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Ametek: Value Creation Through Bolt-On Acquisitions

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- By Ishan Majumdar

Ametek Inc (NYSE:AME) is an industrial conglomerate that is well-known for its electronic instrument products. The company has made a number of strategic acquisitions and divestitures to positively transform and streamline its business during the course of 2020.

In addition to an acquisition-led growth strategy, Ametek invested as much as $246 million in research, development and engineering, which led to dozens of new product launches. The company is shifting towards high-performance equipment in test and measurement, analysis, sensing and imaging, power quality control and precision motors, as opposed to conventional hardware.


Given these factors, could the stock be an appealing investment?

Recent financial performance

Ametek surpassed Wall Street's expectations multiple times during 2020. In its most recent result, the company reported a top-line of $1.20 billion for Q4 2020, which was an 8.11% decrease as compared to the $1.30 billion in revenue reported in the corresponding quarter of 2019. This was largely due to the impact of the Coronavirus, and revenues were in line with the analyst consensus estimate of $1.20 billion.

Ametek's top-line translated into a gross margin of 35.78% and an operating margin of 24.45%, which were higher than the same quarter of 2019.

The company reported net income of $221.03 million and adjusted earnings per share (EPS) of $1.08, beating the analyst consensus estimate of $1.03.

Ametek's cash position was particularly strong as it generated $385.88 million in the form of operating cash flows in Q4 2020 and spent hardly $37.06 million in investing activities, resulting in solid free cash flows.

Acquisition-led growth

Acquisitions have always been the key driver behind the strong margins of Ametek. In March 2021, the company announced its acquisition of Abaco Systems Inc, a mission-critical embedded computing system provider owned by Veritas Capital, for $1.35 billion in an all-cash transaction. Abaco Systems specializes in open-architecture computing and electronic systems for aerospace, defense and specialized industrial markets. This acquisition further broadens the company's differentiated product offerings and positions it across a number of attractive aerospace and defense platforms.

Apart from this, Ametek recently completed three acquisitions - Magnetrol International, Crank Software and EGS Automation (EGS) - for a total of $270 million. Magnetrol and Crank Software are are leaders in advanced analytical, monitoring, testing, calibrating and display instruments and joined the company as part of its Electronic Instruments Group (EIG).

On the other hand, EGS is a differentiated supplier of thermal management systems and automation and engineered solutions that joined the Electromechanical Group (EMG) of Ametek.

Together these three have annual sales of approximately $120 million, which strategically expands Ametek's presence in new areas of growth.

Another value-adding acquisition was IntelliPower, a leading provider of high reliability and uninterruptible power systems for mission-critical defense and industrial applications, which continued to give strong results throughout the quarter.

Strength across all segments

Ametek's EIG segment continues to be a world leader in the precision instrumentation market, delivering excellent operating performance despite challenging market conditions. EIG sells testing and measurement apparatuses that are vitally important to the markets they serve and have very few alternatives.

On the other hand, Ametek's EMG segment, which sells highly engineered mission-critical equipment, also delivered strong operating results in the quarter. The Q4 operating income for EMG alone was $79.8 million, and the operating margin increased by an impressive 110 basis points to 21%.

It is worth mentioning that the company's overall portfolio also has exposure to higher-growing portions of the economy, like medical, which benefits from research spending and the rise of infectious diseases as well as defense spending.

Markedly, in terms of R&D prowess, Ametek's Zygo business, which supplies critical instrumentation and components found in the Laser Interferometer Gravitational-Wave Observatory, also generated year-over-year growth.

Overall, despite the ongoing challenges presented by the pandemic, Ametek's businesses saw solid sequential sales and order improvements in the quarter, evidencing its leading position in the industry.

Valuation

Ametek: Value Creation Through Bolt-On Acquisitions
Ametek: Value Creation Through Bolt-On Acquisitions

As we can see in the chart above, the stock price of Ametek has increased by more than 70% in the past 12 months, which can be partially attributed to a highly positive market perception with respect to the company's acquisitions.

Ametek is currently trading at a price-earnings ratio of 35.42 and an enterprise-value-to-revenue ratio of 7.05, which are both significantly higher than the median for the electrical equipment industry.

However, the high profitability, coupled with the fact that Ametek favors smaller, relatively low-risk bolt-on acquisitions where there is a meaningful post-deal margin improvement opportunity, are important factors responsible for the growth story of the company. Thus, despite the high valuation, I believe that the company deserves a "Hold" rating.

Disclosure: No positions.

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This article first appeared on GuruFocus.