Morningstar | Another Quarter of Double-Digit Sales and Order Growth Rates for Metso in 2Q
Metso reported firm sales (up 15% compared with the year-ago period) and healthy order intake (up 14% year on year), mainly driven by large iron ore grinding line equipment orders booked during the second quarter and increasing demand for aggregates equipment in India and North America. Despite a negative sales mix, Metso’s adjusted EBITDA margins increased 130 basis points, owing to operational leverage and cost control. We are updating our estimates to reflect the latest developments, which could result in an increase of between 5% and 10% in our fair value estimate of EUR 27 per share, as reported revenue and orders received exceeded our estimates. We maintain our no-moat rating. Even after the potential increase to our fair value estimate, we believe the shares are currently overvalued. Order inflow for Metso over the first six months was strong, rising by 16%, while the order backlog currently sits at EUR 1.6 billion, up from EUR 1.44 billion at this time last year. In order for this backlog to translate into profitability, Metso would have to deliver flawless execution, which is a big ask in our view.The company's profitability in 2018-19 will likely benefit from growth in the higher-margin services business. Net sales for the services business amounted to EUR 442 million, up 10% versus the prior year. We are happy with this result, as strong development of Metso's services business helps to offset revenue and margin swings in the company's capital equipment offerings. A large installed base of machines drives fairly consistent revenue from spare and wear parts, as mining and construction technology in particular are subject to heavy wear over a machine's life cycle. Despite Metso's installed base, we don't believe that switching costs are high enough to justify an economic moat.
Metso is a global services, products and systems provider. Co. serves its customers in mining, oil and gas as well as aggregates industries. Co. serves also some other process industries, such as pulp and paper industry. Co.'s offerings to the mining industry include grinding mills, mill linings and grinding media; as well as crushers and screens. Co.'s offerings to the aggregates industry include crushers; as well as screens, feeders and conveyors. Co.'s offerings to the oil and gas industry include control valves, on-off valves; intelligent safety valves; intelligent valve controllers and limit switches; intelligent field services; spare and wear parts; as well as performance services.
Morningstar, Inc. is a leading provider of independent investment research in North America, Europe, Australia, and Asia. The company offer an extensive line of products and services for individual investors, financial advisors, asset managers, and retirement plan providers and sponsors.
Morningstar provides data on approximately 530,000 investment offerings, including stocks, mutual funds, and similar vehicles, along with real-time global market data on more than 18 million equities, indexes, futures, options, commodities, and precious metals, in addition to foreign exchange and Treasury markets. Morningstar also offers investment management services through its investment advisory subsidiaries and had approximately $185 billion in assets under advisement and management as of June 30, 2016.
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