A high quality industrial company you may never have heard of AMETEK is a US listed, differentiated global industrial conglomerate. A first-rate management team employs a decentralised operating model that has delivered standout growth and returns. It is a collection of giants-in-niches, operating businesses with leadership positions in markets where it can leverage superior scale into technology investment and product differentiation that lends further support to its outsized market share (and pricing power).
Its engineered products are typically small ticket items with high criticality; things like electronic instrumentation for harsh environments, motion control equipment, specialty metals (e.g. for medical implants) and interconnects, among many others. The pricing power supports greater than 20% operating profit margins and strong results in both deflationary and inflationary environments.
Broad customer base
Customers are found all over. From aerospace to medical technology, power generation to general industrial manufacturing. Demand is driven by customer capital expenditure, inherently cyclical but customer diversity provides a degree of earnings resilience over a business cycle, and its acquisition model helps AMETEK chart its own course. Sales have grown circa 9% p.a. since 2010, and of this circa 6% p.a. stems from acquisitions. Margin improvement has translated that 9% sales growth into circa 12% earnings-per-share (EPS) growth.
Growth through acquisition
AMETEK has acquired 100 companies since the turn of the century. For years, the approach was to buy under-managed giants-in-niches, companies that had the market position, but not the management excellence to generate the profits that leadership position should underwrite. Following acquisition, AMETEK deploys its continuous improvement tools to improve growth, profit margins and cash generation, generating a healthy return on investment. Under the current CEO, David Zapico, the acquisition strategy has placed a greater emphasis on targets with higher underlying growth, but the disciplined deal assessment process and post- acquisition playbook remains the same. The acquisition pipeline remains long, and AMETEK’s cash generation and strong balance sheet positions it well to capitalise on future opportunities.
A core industrial holding
We see merit in AMETEK as a core industrial holding (subject to the stock’s valuation of course), despite the cyclical nature of d emand which can lead to volatile stock performance over a business cycle. This is underpinned by AMETEK’s demonstrated ability to deliver strong profits and cash flows in good times and bad, together with its disciplined approach to acquisitions that add juice to its growth prospects. AMETEK has delivered superior returns historically, with total shareholder returns of 380% in the past ten years, well ahead of the 220% achieved by the MSCI World Index.
AMETEK has a broad group of businesses from aerospace to medical technology, power generation to general industrial manufacturing.