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Morningstar | Mettler Delivers Strong 4Q, Cautious in Its Outlook; Shares Expensive

Mettler-Toledo delivered strong local currency sales growth of 8% in the fourth quarter but remained cautious in its 2019 guidance as it anticipates weaker macro conditions combined with reduced activity related to China-U.S. tariffs. We're maintaining our fair value estimate and our narrow moat rating. The shares remain overvalued.

Organic sales in the largest product market, laboratory, were up a healthy 7% in local currency, with strong performance across all product lines. The industrial segment grew 13% in the quarter, well-above our targets, but we expect this business to moderate in 2019 as it is more heavily exposed to macroeconomic conditions as well as China. We note that while China business, which grew strong again in the quarter, is still very reliant on the manufacturing activity, Mettler has substantially diversified its presence within this region. A healthy lab demand should provide for a softer landing even if China's industrial activity decelerates dramatically.

Mettler's still relatively nascent but rapidly growing service business should also make the overall business less cyclical than it had been in the past. Service along with software now accounts for almost a third of Mettler's total revenue, and we anticipate the company continue to drive greater adoption of service contracts.

The Chinese-U.S. tariff situation remains a headwind for the company, but Mettler is managing it through supply chain and pricing initiatives. On the pricing side, the company delivered another 200 basis points of improvement, in line with our forecasts. We anticipate Mettler will hit its 100 basis points margin improvement target in 2019.