Ametek (AME)

December 12, 2019

COMPANY DESCRIPTION

Based in Berwyn, Pennsylvania, Ametek Inc.(AME)  is a global manufacturer of electronic

instruments and electromechanical devices; it has more than 220 manufacturing locations
worldwide. Its electronic instruments group makes monitoring, testing and calibrating devices
for the aerospace, industrial and power markets. Its electromechanical group manufactures
vacuum motors, as well as materials, interconnects and packaging for the aerospace, industrial
and petroleum markets.

INVESTMENT THESIS

The company’s products are well positioned in markets in which there are few competitors.
Ametek’s long history of operational excellence is likely to continue and acquisitions should
enable it to double earnings within the next five years. AME allocates 5% of revenue to R&D,
which results in high returns on equity (18% in 2018). Lastly, about a quarter of revenue comes
from products launched during the previous three years.

RECENT DEVELOPMENTS

On October 31, Ametek, Inc. reported solid revenue and earnings growth. Revenue was $1.28
billion, slightly below the consensus estimate of $1.29 billion. This amounted to a 7% increase in
revenue (3% organically). Order growth and recent acquisitions also contributed to revenue
gains.  The operating margin increased to 23.6% from 22.2% in 3Q17. Third-quarter EPS of
$1.06 was above management’s guidance range of $1.00-$1.02 per share and the consensus
estimate of $1.01.

In September 2019, to improve its position in the aerospace and defense industry, AME paid
$125 million to acquire Pacific Design Technologies  This follows the acquisition last year of
Forza, which designs and produces imaging sensors used in medical and defense applications.
EARNINGS & GROWTH ANALYSIS

For the fourth quarter, management expects revenue to increase by a mid-single-digit amount
year over year. Earnings are projected to total $1.00-$1.03, a 5%-7% year over year
improvement.

Following another strong quarter, Ametek increased its full-year guidance; it now expects EPS to
be in a range of $4.12-$4.14 per share, up from a prior forecast of $4.04-$4.10. Management’s
revised forecast is based on prospects for low double-digit revenue growth. Our estimate is for
12% revenue growth in 2019.

We expect earnings to continue to grow. For 2019, our earnings estimate is $4.20 in 2019, rising
to $4.56 in 2020.

RISKS

Because Ametek Inc. is in a cyclical industry, a weakening economy is a risk to our estimates
and price target. Similarly, weak demand in certain of AME’s product markets could hurt results.
The company could have difficulty integrating acquisitions and find it difficult to obtain the
hoped for revenue and cost benefits.

VALUATION

The AME shares trade at higher multiples than other industrial stocks. We think this premium is
warranted by its highly profitable operations and prospects for strong growth over the next
several years. Multiplying our 2020 estimate by 25.8 produces a target price of $118. At its
current price, our target, if achieved offers investors the prospect of a 20% return, including its
dividend.

Ametek (AME)

Current Price: $98.67

Target Price: $118

Current Valuation: 21.6 times FY20 EPS

Target Valuation: 25.8 times FY20 EPS