Morningstar | Raising Our Mettler FVE as Company Delivers Good 3Q; Shares Still Rich
Narrow-moat Mettler-Toledo delivered strong local currency sales growth of 7% in the third quarter, and we are modestly raising our fair value estimate to $428 per share, largely as a result of cash flows realized since our last update. The shares remain overvalued, although the gap between our valuation and the stock price has narrowed.Organic sales in the largest product market, laboratory, were up a solid 11% in local currency, largely a product of nearly 20% demand growth from Chinese lab customers. China continues to deliver excellent results for the firm even as comparisons stay challenging and tariffs are starting to provide some headwind. As a whole, China was up 12%, and even the industrial business, which is typically most susceptible to a macroeconomic-related slowdown, grew in the high single digits in the quarter. With nearly 20% of total sales from China, Mettler has the highest exposure to this market and thus stands to see the most outsize impact of any reverberations from a broader slowdown in this economy. Nonetheless, we still anticipate this geography to grow in the high single digits throughout our forecast, as demand for quality-control instrumentation in pharmaceutical and industrial applications has a long growth trajectory.
Outside China and lab, Mettler saw decent performance in its industrial segment and unexpected healthy growth in food retail, which we don't anticipate to persist. By geography, Americas was up 5%, Europe 3%, and Asia/rest of world at 11% (in local currency terms).
The Chinese-U.S. tariff situation is a headwind for the company. Mettler’s management provided some guidance on the magnitude of its impact, and we are incorporating a $15 million-$25 million annual operating income hit from the tariffs starting in 2019. The company plans to implement key supply-chain and pricing strategy initiatives to offset the impact, and given its record, we don't see any margin erosion from current levels.
Mettler-Toledo International is a supplier of precision instruments and services. The company manufactures weighing instruments for use in laboratory, industrial, packaging, logistics, and food retailing applications. The company also manufactures several related analytical instruments and provides automated chemistry solutions used in drug and chemical compound discovery and development. In addition, the company manufactures metal detection and other end-of-line inspection systems used in production and packaging and provides solutions for use in certain process analytics applications. The company has five segments: United States Operations, Swiss Operations, Western European Operations, Chinese Operations, and Other.
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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