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Morningstar | Ametek Posts a Great 2018 3Q and Looks Strong Going Into 2019

Narrow-moat-rated Ametek had a great 2018 third-quarter performance, prompting us to revisit some of our assumptions, both in the near term and over the long term. We raised our fair value estimate to $63 from $60, about a $1 related to the time value of money, $1 related to stronger-than-expected 2018 full-year performance and management’s upgraded guidance, and $1 for more robust long-term growth assumptions on management’s commentary that the recovery is in the early stages. This suggests to us that Ametek is confident that it has a strong runway for growth with the order visibility it has.

Thus far this year, total firm organic sales of 7% year over year were above both our and management’s expectations. The firm reported broad-based strength across all its businesses, as well as its geographies. The electronic instruments segment’s Ultra Precision Technologies division specifically had another breakout quarter, with midteens organic sales growth year over year. Reported growth came in at 10% year over year, based on the contribution from acquisitions. These include Motec, Soundcom, and Arizon Instrument in its electronic instruments segment, and FMH Aerospace in its electromechanical group segment. Total operating income margins, moreover, increased 100 basis points versus the prior-year period. While we expect a year-over-year improvement in the fourth quarter’s operating margins, we are modeling a sequential decline to each of the firm’s segment margins given seasonal effects in the fourth quarter. As a result, we now expect full-year 2018 GAAP EPS of $3.25, at the bottom end of management’s updated guidance.

That said, we think the market has recognized the full extent of Ametek’s value, and consensus estimates are simply too far ahead of economic reality, with current valuations ignoring the effect of economic cycles. From 2009 to the end of 2017, the firm has grown sales at a compound annual rate of 9.4%. This number bakes in the industrial recession but clearly ignores the crisis. While we don’t anticipate an economic crisis on par with the Great Recession, we certainly don’t think cycles are dead, and our robust 8.8% average annual growth assumptions from 2018-22 are tempered by 21.3% normalized operating margins (90 basis points below our 2018 forecast) that account for the cyclicality inherent in Ametek’s business.

Management also provided some updates to its two most recent acquisitions in Telular and Forza. Telular provides communication solutions for military and security applications, with an appreciable portion (65%) of sales from recurring subscription-based (and higher-margin) revenue. Forza produces sensors in medical, defense, and industrial applications, and this acquisition appears to bring with it some differentiated imaging technology. Ametek had the advantage that one of its portfolio businesses was previously a Forza customer. With these two acquisitions, Ametek has acquired five businesses in 2018, deploying more than $900 million in capital year to date.