Morningstar | Strong Start to Year for Mettler; Shares Remain Expensive
We anticipate modestly raising our fair value estimate for Mettler-Toledo as the company delivered strong local-currency sales growth of 7% in the first quarter, ahead of our expectations. There are still uncertainties for the remainder of the year, but Mettler sounded upbeat on its full-year outlook (raising its local-currency forecast by 50 basis points) while acknowledging likely macro headwinds and potential implications from China-U.S. tariffs. The shares remain overvalued, in our view. Our narrow moat rating is unchanged.Organic sales in the largest product market, laboratory, were up a healthy 8% in local currency, with strong performance across all product lines. The industrial segment grew 8% in the quarter, well above our targets; core industrial strength was particularly impressive at 9% while product inspection moderated a bit but grew an impressive 6% in the quarter. We anticipate the industrial business to moderate in 2019 as it is more heavily exposed to macroeconomic conditions as well as China. China grew in double digits again in the quarter, and remarkably, Mettler hasn't seen any impact so far from tariffs. Healthy lab demand should provide for a softer landing even if China's industrial activity, affected by tariffs, decelerates dramatically.
Mettler's still relatively nascent but rapidly growing service business should also make the overall business less cyclical than it was in the past. Service along with software now accounts for almost a third of Mettler's total revenue, and we anticipate the company to continue to drive greater adoption of service contracts. Mettler's service revenue grew 8% in the quarter.
Mettler continues to impress on the margin and earnings side, as it is effectively managing currency headwinds through supply chain and pricing initiatives. The company delivered 2%-plus of pricing increases. We anticipate Mettler will hit its 100-basis-point margin improvement target in 2019.
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.
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