cfa institute investment research challenge scranton team presentation - ametek
DESCRIPTION
A presentation a group of students from The University of Scranton (including me) made as part of the CFA Institute of Philladelphia Investment Research Challenge.TRANSCRIPT
CFA Philly IRC - Scranton Team 1
HOLD on Ametek (AME)
Thursday, March 4, 2010The University of Scranton Team
CFA Society of Philadelphia – Investment Research ChallengeMike Dwier ‘10, Fred Fuchs ‘10, Tom Prokop ‘10, Blaise Schultheis ‘10, John Walker ’10
Thurs 3/4/2010
Agenda
Thurs 3/4/2010
1. Highlights of a Hold2. Macroeconomic Forecast3. The Margin
Expansion Story4. Summary
CFA Philly IRC - Scranton Team 3
Highlights of a Hold
Valuation Highlights Stock Price History
Thurs 3/4/2010
Target of $37.17 is approximately 7% below current market price $40.1.
Investment 10Yr Annual Return
AME 19.2%
S&P Industrials 1.8%
S&P 500 -0.9%
Quarter Q4 Q1 Q2 Q3 Q4 Full YearYear 2009 2010 2010 2010 2010 2010Date 12/31/2009 3/31/2010 6/30/2010 9/30/2010 12/31/2010
Sales 523.50$ 533.97$ 541.98$ 547.40$ 551.50$ 2,175$ Cost of Sales 359.07$ 362.53$ 367.09$ 369.87$ 371.75$ 1,471$ Selling, General & Admin 64.74$ 59.08 54.62 55.21 55.67 225$ Depreciation & Amortization 10.50 13.85 13.99 14.13 14.28 56$ Interest Expense 17.62$ 19.16$ 19.64$ 20.23$ 20.83$ 80$ Pretax Income 71.58$ 79.36$ 86.65$ 87.96$ 88.98$ 343$ Income Taxes 19.69$ 25.39$ 27.73$ 28.15$ 28.47$ 110$ Net Income 51.88$ 53.96$ 58.92$ 59.81$ 60.51$ 233.20$ EPS 0.48$ 0.50$ 0.55$ 0.55$ 0.56$ 2.16$
TargetP/E 17 36.76$
P to FCF 13 36.17$ P to Sales 1.7 34.28$ P to Book 1.9 41.46$
37.17$
Multiple
Weighted Avg
CFA Philly IRC - Scranton Team 4
Price and Growth Comparables
PE Multiple Revenue & Earnings 10yr CAGR
Thurs 3/4/2010
At 21x earnings, AME is more expensivethan the 16.5x normalized industry average…
Source: S&P Compustat. Sales Growth is 10 year CAGR, 1999-2009. Industry is GICS Electrical Components & Equipment Sub-Industry firms with market capitalizations above $1 billion.
Firm Trailing PE Norm PE
Ametek 21.0 20.7
Regal-Beliot Corp 21.6 14.7
Rockwell Automation 44.1 19.0
Roper Industries 21.6 15.7
Thomas & Betts 18.5 13.0
Woodward Governor 22.5 22.9
Industry 21.2 16.5Source: S&P Compustat. Industry is GICS Electrical Components & Equipment Sub-Industry firms with market capitalizations above $1 billion. Normalized P/E’s are 5 year normalized (2005-2009).
Firm Revenue EPS
Ametek 7.9% 13.0%
Regal-Beliot Corp 12.0% -8.9%
Rockwell Automation -2.8% 17.6%
Roper Industries 12.2% -252%
Thomas & Betts 9.9% -3.1%
Woodward Governor 11.6% 11.8%
Industry 8.2% 5.9%
… because of AME’s historically high earnings growth rate.
CFA Philly IRC - Scranton Team 5
AME’s Growth Drivers
Growth Drivers
1. Robust economic growth
2. Gross margin improvement from differentiation.
3. Net margin improvement from M&A synergy realization.
What Justifies 21x P/E?
Thurs 3/4/2010
13% ten year CAGR of earnings What is the future of these drivers?
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
$0
$50,000,000
$100,000,000
$150,000,000
$200,000,000
$250,000,000
$300,000,000
$41,739,000$60,768,000$68,532,000$66,111,000
$83,698,000$87,815,000$112,711,000
$140,643,000
$181,934,000
$228,020,000$246,952,000
Agenda
Thurs 3/4/2010
1. Highlights of a Hold2. Macroeconomic Forecast3. The Margin
Expansion Story4. Summary
AME Levered to GDP Growth
AME Share Price to Real GDP AME Sales Growth to Real GDP Growth
Thurs 3/4/2010 CFA Philly IRC - Scranton Team 7
Sources: Yahoo Finance, Historical Prices;Economagic, Real GDP Chained Weighted In 2005 Dollars
Sources: S&P Compustat, AME Sales; Economagic, Real GDP Chained Weighted In 2005 Dollars
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
-3%
-2%
-1%
0%
1%
2%
3%
4%
5%
6%
-20%
-15%
-10%
-5%
0%
5%
10%
15%
20%
25%
30%
Real GDP Growth (Left Scale) AME Sales Growth (Right Scale)
Real
GD
P G
row
th
AM
E Sa
les
Gro
wth
$10,000,000,000,010.0
$10,500,000,000,010.0
$11,000,000,000,010.0
$11,500,000,000,010.0
$12,000,000,000,010.0
$12,500,000,000,010.0
$13,000,000,000,010.0
$13,500,000,000,010.0
$14,000,000,000,010.0
$0
$5
$10
$15
$20
$25
$30
$35
$40
$45
Real GDP (Left Scale)AME Share Price, Annual Average (Right Scale)
Real
GDP
AME
Shar
e Pr
ice, A
nnua
l Ave
rage
Where is GDP Now?
Contributing Real GDP Factor Q1 Q2 Q3 Q4
Real GDP -6.4 -0.7 2.2 5.9
Consumption 0.4 -0.6 1.9 1.2
Investment -9.0 -3.1 0.5 4.6
Inventories -2.4 -1.4 0.7 3.9
Net Exports 2.6 1.7 -0.8 0.3
Government -0.5 1.3 0.6 -0.2
Thurs 3/4/2010 CFA Philly IRC - Scranton Team 8
0.0%
0.5%
1.0%
1.5%
2.0%
2.5%
3.0%
3.5%
4.0%
4.5%
5.0%
1.23%
4.63%
3.88%
Q409 % Change in Contribution to Headline Real GDP
Consumption Investment InventoriesReal GDP, Table 2Bureau of Economic AnalysisData published February 26, 2010 Seasonally Adjusted at Annual Rates Quarterly Data from 1947 to 2009
CFA Philly IRC - Scranton Team 9
Where Does GDP Leadership Come From?
A Stroll Down Memory LanePercentage Contributions
to Real GDP Growth
Thurs 3/4/2010
Recession Initial Rebound
Sustained Recovery
Current Investment What Will it Be?
2002 Investment Consumption
1991 Consumption Consumption
1983 Consumption & Investment Investment
1980 Investment Double Dip
1975 Consumption Consumption1975 1980 1983 1991 2002 2009
-4
-2
0
2
4
6
8
C I G NX Source: Bureau of Economic Analysis, 2/26/10Seasonally Adjusted at Annual Rates, Quarterly Data
The basis for a sustainable and robust recovery is uncertain.
Consumer Expectations and Consumer Confidence
• Negative Wealth Effect• Poor employment
outlook• Income expectations• Tax expectations
Thurs 3/4/2010 CFA Philly IRC - Scranton Team 10
Sustained Consumption: What's The Function?
• Strong Q3 2009 consumption data: Up 1.9% sequentially
• Consumption contributed over 86% of headline GDP change in Q3 2009.
• Q4 Consumption: the “clunker” hangover
GDP
C
Durables
MV & Parts
Non-durables Services
I G NX
1 2 3 4
-30
-20
-10
0
10
20
30
40
50Q/q % Change in Contribution to PCE
Personal consumption expendituresGoods Durable goods Motor vehicles and parts
Cash Strapped Consumers
Personal Income - Taxes= Disposable Personal Income (DPI)
DPI – Savings - Debt Service = Expenditure Capabilities
Thurs 3/4/2010 CFA Philly IRC - Scranton Team 12
2000-2009 Average 2009 Average0
100
200
300
400
500
600
$260 B
$470 B
Personal Savings
Bureau of Economic AnalysisData published February 26, 2010
3470035796
3689237987
3908310
11
12
13
14
15
Household Debt Payments as a % of Disposable Income
Agenda
Thurs 3/4/2010
1. Highlights of a Hold2. Macroeconomic Forecast3. The Margin
Expansion Story4. Summary
CFA Philly IRC - Scranton Team 14
The AME Margin Expansion Story
Two Types of ME
1. Gross profit margin expansion from the switch to differentiated products
2. Net profit margin expansion from M&A-related synergies
Margins Over Time
Thurs 3/4/2010
1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009-200
-150
-100
-50
0
50
100
150
200
Gross Margin ExpansionNet Profit Margin Expansion
Mar
gin
Expa
nsio
n, b
ps
CFA Philly IRC - Scranton Team 15
Gross Margin: Switching to Differentiated Products
Thurs 3/4/2010
98 99 00 01 02 03 04 05 06 07 08 0970%
72%
74%
76%
78%
80%
82%
84%
86%
88%
1998: 70% differen-tiated
2009: 87% differen-tiated
CFA Philly IRC - Scranton Team 16
Net Margin: Acquisition Synergies
Conceptual Model
: Margin Improvement due to Acquisition Synergies
: Average Acquisition Target Margin Improvement
: Acquired Revenue, Period t: Total Revenue, Period t
: Average Target Revenue, Period t: Number of Acquisitions, Period t
Hypothetical Exercise:Double Size of AME in 5 Years
Thurs 3/4/2010
“Beware of geeks bearing formulas…”- Warren Buffett, Berkshire Hathaway
MI AS t=ATMI t∗ARtTR t
% of Revenue Eligible for Synergy-related MI
Average BPS of synergies wrung from acquisitions
2003-2009a Yearly Average 2015e
Total Revenue $1.76B $3.5B
Acquired Revenue $170MM $340MM
Acquisition Contribution 9.5% 9.5%
2003-2009a
2015e
Option 1:Double NA
Option 2:Double ATR
$45MM $45MM $90MM
3.7 per year 7.5 per year 3.7 per year
$170MM $340MM $340MM
ARt=ATRt×NAt
Management Distraction?
Can be maintained?
CFA Philly IRC - Scranton Team 17
Net Margin: Acquisition Synergies
Industry Study
Thurs 3/4/2010
0.25 - 0.5
0.5 - 1.0
1.0 - 2.0
2.0 - 3.0
Over 3.0
2.0
2.5
3.0
3.5
4.0
4.5
5.0
5.5
6.0
Annual Revenue ($B)
Ope
ratin
g Le
vera
ge R
atio
(SG
A/C
OS)
Source: S&P Compustat, 2005-9 Average operatingleverage in the GICS Electrical Components & Equipment Sub-Industry, 142 firms.
Operating Leverage
• In this industry, larger companies typically have less operating leverage
• There are less fixed costs (SG&A) in larger companies
• Since most acquisition synergies come from SG&A, this means a lower potential for .
Agenda
Thurs 3/4/2010
1. Highlights of a Hold2. Macroeconomic Forecast3. The Margin
Expansion Story4. Summary
CFA Philly IRC - Scranton Team 19
Summary
• Ametek has relied upon 3 factors to drive growth:1. Robust economic growth2. Gross margin improvement from differentiation.3. Net margin improvement from M&A synergy realization
• These factors cannot be relied upon going forward to deliver the same growth.
• AME has a solid and experienced management team
• Yet a 21x P/E multiple is still rich given the risks associated with finding new sources of growth
Thurs 3/4/2010
Disclosures
Thurs 3/4/2010
Ownership and material conflicts of interest:The author(s), or a member of their household, of this report does not hold a financial interest in the securities of this company. The author(s), or a member of their household, of this report does not know of the existence of any conflicts of interest that might bias the content or publication of this report. Receipt of compensation:Compensation of the author(s) of this report is not based on investment banking revenue.Position as a officer or director:The author(s), or a member of their household, does not serves as an officer, director or advisory board member of the subject company.Market making:The author(s) does not act as a market maker in the subject company’s securities.Ratings guide:Banks rate companies as either a BUY, HOLD or SELL. A BUY rating is given when the security is expected to deliver absolute returns of 15% or greater over the next twelve month period, and recommends that investors take a position above the security’s weight in the S&P 500, or any other relevant index. A SELL rating is given when the security is expected to deliver negative returns over the next twelve months, while a HOLD rating implies flat returns over the next twelve months.Investment Research Challenge and Global Investment Research Challenge Acknowledgement:The CFA Philadelphia Investment Research Challenge as part of the CFA Institute Global Investment Research Challenge is based on the Investment Research Challenge originally developed by the New York Society of Security Analysts.Disclaimer:The information set forth herein has been obtained or derived from sources generally available to the public and believed by the author(s) to be reliable, but the author(s) does not make any representation or warranty, express or implied, as to its accuracy or completeness. The information is not intended to be used as the basis of any investment decisions by any person or entity. This information does not constitute investment advice, nor is it an offer or a solicitation of an offer to buy or sell any security. This report should not be considered to be a recommendation by any individual affiliated with CFA Philadelphia, CFA Institute or the Global Investment Research Challenge with regard to this company’s stock. Contacts
Faculty ContactDr. Murli Rajan, [email protected]
Student ContactFred Fuchs ‘[email protected]
Special Thanks ToChris Ouimet, Industry MentorThe CFA Society of Philadelphia
Ametek