In this article, let's take a look at Ametek Inc. (AME, Financial), a $12.88 billion market cap company, which is a leading global niche-market manufacturer of electronic instruments and electro-mechanical devices.
Business model
The company focuses on innovations so it is constantly creating value for its customers. Low-cost strategies are not the only things that matter. Additionally, based on satisfaction, it creates good operating margins (we are going to see them later) and sustainable growth through the ability to produce high-quality products at competitive prices.
The firm operates in several businesses. In all of them, it has competitive advantages. Customers are in industries like: aerospace, process, analytical and power end markets. Once they make a deal with Ametek, they cannot run away so easily. For example, for the Boeing 787 Dreamliner, once the company designed the product, it is almost impossible to switch costs from another competitor. What we are trying to say is that a known revenue stream is created, and it is very valuable.
Further, the diversification in so many markets makes that a negative impact in one does not cause too much hurt for the whole firm.
Technological advances
The company has some technological advantages over its peers. This helps it to develop innovative products, primarily in the aerospace and defense, medical, business machines and other industrial applications.
Acquisitions
Ametek generates good cash from operations, and it uses it to acquire additional businesses instead of investing in capex. Target businesses are those that are extensions of its current portfolio and generally are smaller businesses that do not compromise too much in case of a bad decision.
Moreover, those businesses are preferably dominant in their market. Other possibility is that they offer differentiated products.
Revenues, margins and profitability
Looking at profitability, revenue growth by 12.73% led earnings per share increased in the most recent quarter compared to the same quarter a year ago ($0.61 vs $0.52). During the past fiscal year, the company increased its bottom line. It earned $2.10 versus $1.89 in the prior year. This year, Wall Street expects an improvement in earnings ($2.42 versus $2.10).
The gross profit margin is currently high at 38.15% while its net profit margin of 15.14% is higher than the industry average.
Finally, let´s compare the best measure of performance for a firm's management: the return on equity. The ROE is useful for comparing the profitability of a company to that of other firms in the same industry.
| Ticker | Company | ROE (%) |
| AME | Ametek | 16.50 |
| ST | Sensata Technologies Holding N.V. | 16.58 |
| SCTY | SolarCity Corp. | -9.03 |
| AYI | Acuity Brands Inc | 12.80 |
| EMR | Emerson Electric Co | 18.90 |
| ETN | Eaton Corp. PLC | 11.10 |
| Industry Median | 7.18 |
The company has a current ROE of 16.50% which is higher than the industry median. Also, it is higher than the ones exhibit by SolarCity Corp. (SCTY, Financial), Acuity Brands Inc. (AYI, Financial), Eaton Corp. (ETN, Financial) and practically the same as Sensata Technologies Holding (ST, Financial). In general, analysts consider ROE ratios in the 15-20% range as representing attractive levels for investment. So, for investors looking at those levels, Emerson Electric Co. (EMR, Financial) could be the option. It is very important to understand this metric before investing, and it is important to look at the trend in ROE over time.
Relative Valuation
In terms of valuation, the stock sells at a trailing P/E of 23.3x, trading at a discount compared to an average of 24.2x for the industry. To use another metric, its price-to-book ratio of 3.8x indicates a premium versus the industry average of 1.87x while the price-to-sales ratio of 3.4x is above the industry average of 1.06x.
As we can see in the next chart, the stock price has an upward trend in the five-year period. If you had invested $10.000 five years ago, today you could have $38.970, which represents a 31.3% compound annual growth rate (CAGR).
The company increased earnings at a double-digit rate over that time frame.
Final comment
As outlined in the article, Ametek has grown by implementing strategies such as operational efficiency, product innovation and strategic acquisitions that helped to achieve the double-digit annual percentage growth in earnings per share.
The PE relative valuation and the return on equity that significantly exceeds the industry average and make me feel bullish on this stock.
Hedge fund gurus like Jeremy Grantham (Trades, Portfolio) and Jim Simons (Trades, Portfolio) added this stock to their portfolios in the second quarter of 2014.
Disclosure: Omar Venerio holds no position in any stocks mentioned
