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Morningstar | Ametek Posts Solid 4Q Performance That Exceeds Our Expectations

Narrow-moat-rated Ametek had a great fourth quarter and close of 2018, with sales and net income handily beating our expectations for the year. While we may make slight adjustments in our model to the upside for 2019, we don’t plan on materially changing our $63 fair value estimate. The company gave recent guidance heading into next year, including full-year diluted GAAP EPS of $3.52-$3.62 and first-quarter sales (including acquisitions) rising in the high single digits year over year on a GAAP basis.

The company continues to generate strong results over the long term, impressively increasing sales at a 10% compound annual growth rate and EPS at a 16% CAGR over the past decade. None of these results have come at the expense of free cash flow, however, which the company has primarily redeployed to the tune of $1.1 billion in acquisitions in 2018, as well as deploying $364 million in share repurchases in the quarter (the latter implies management believes its stock is cheaper than our fair value estimate suggests).

Both of Ametek's segments had strong results, led by the better-than-expected results from the electronic instruments group, which saw record fourth-quarter sales of $826 million, up 11% over the 2017 fourth quarter. The electromechanical group saw equally impressive top-line results of $445 million in the fourth quarter, an 11% year-over-year rise. For the full year, the electronic instruments group’s GAAP operating margins rose 80 basis points to 25.8%, while the electromechanical group’s GAAP operating margins rose 90 basis points to 19.9%. Over the past 10 years, the firm has successfully expanded its operating margins over 5 percentage points, demonstrating its effective commitment to techniques like lean and Six Sigma operations.

Another pillar of Ametek’s success is its commitment to new product development, as the firm allocates about 5% of sales to research and development, just behind wide-moat 3M (which typically allocates about 6% of sales to R&D). We think this should allow the company to put forth continuing organic growth of about 3.5% over the next few years, while its high hurdle rate of acquisitions should add another value-creative 4.5% year-over-year top-line growth. Many of its recently acquired businesses benefit from switching costs, such as Telular (logistics management) with its recurring, subscription-based revenue model, and intangible assets with Spectro Scientific (machine monitoring) and its portfolio of differentiated technology, including 65 patents. We’re encouraged by management’s comment that the pipeline for M&A looks roughly equivalent to last year’s acquisitions, and while we expect growth to moderate heading into this year, we believe Ametek is well positioned for continued success.