Ametek Offers Good Opportunities for Growth

Author's Avatar
Feb 27, 2015

In this article, let's take a look at Ametek Inc. (AME, Financial), a $12.84 billion market cap company, which is a leading global niche-market manufacturer of electronic instruments and electro-mechanical devices.

Growth Drivers

The company focuses on technological advantages which help it to develop innovative products, primarily in the aerospace and defense, medical, business machines and other industrial applications.

Further, the company is expanding in promising areas such as China, Russia and the Middle East. This diversification is good to protect the firm from a negative impact in any one region.

Last but not least, Ametek made strategic acquisitions with the cash flow generated from operations, expanding its current portfolio.

Liquidity

The current debt-to-equity ratio of 0.53 is considered rather low and is below the industry mean. Also, it has a quick ratio of 1.16, which shows the company's ability to meet its short-term obligations with its most liquid assets.

Revenues, Margins and Profitability

Looking at profitability, revenues rose by 8.66% and led earnings per share increased in the most recent quarter compared to the same quarter a year ago ($0.62 vs $0.55). According to Zacks consensus, it beat the estimates on earnings, but misses on revenues. During the past fiscal year, the company increased its bottom line. It earned $2.37 versus $2.10 in the previous year. This year, Wall Street expects an improvement in earnings ($2.60 versus $2.37).

The net income increased by 12% when compared to the same quarter one year before, from $135.67 million to $152 million.

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 17.67
ST Sensata Technologies Holding N.V. 23.87
SCTY SolarCity Corp. -8.48
AYI Acuity Brands Inc 16.23
EMR Emerson Electric Co 21.39
ETN Eaton Corp. PLC 10.78
 Industry Median 7.63

The company has a current ROE of 17.67%, 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) and Eaton Corp. (ETN, Financial). In general, analysts consider ROE ratios in the 15-20% range as representing attractive levels for investment. For investors looking at those levels, Emerson Electric Co. (EMR, Financial)Â and Sensata Technologies Holding (ST, Financial) could be the options. It is very important to understand this metric before investing and it is important to look at the trend in ROE over time.

Year ROE (%)
Dec-05 18.56
Dec-06 20.49
Dec-07 20.66
Dec-08 19.53
Dec-09 14.42
Dec-10 16.99
Dec-11 20.09
Dec-12 20.01
Dec-13 18.23
Dec-14 18.33

Relative Valuation

In terms of valuation, the stock sells at a trailing P/E of 22.5x, trading at a discount compared to an average of 24.5x for the industry. To use another metric, its price-to-book ratio of 4.04x indicates a premium versus the industry average of 1.87x, while the price-to-sales ratio of 3.27x is above the industry average of 1.16x.

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 $30,817, which represents a 25.3% compound annual growth rate (CAGR).

The company increased earnings at a double-digit rate over that time frame.

Final Comment

The company focuses on innovations, so it is constantly creating value to its customers. It creates good operating margins and sustainable growth through the ability to produce high-quality products at competitive prices.

The PE relative valuation and the return on equity that significantly exceeds the industry average make me feel bullish on this stock.

On the other hand, Ray Dalio (Trades, Portfolio) sold out the stock in the last quarter of 2014, while other hedge fund managers like Jeremy Grantham (Trades, Portfolio), Mario Gabelli (Trades, Portfolio), Jim Simons (Trades, Portfolio), Louis Moore Bacon (Trades, Portfolio) and Steven Cohen (Trades, Portfolio) reduced their positions, as well as Columbia Wanger (Trades, Portfolio) and RS Investment Management (Trades, Portfolio).

Disclosure: Omar Venerio holds no position in any stocks mentioned