Ametek Earnings: Strong EIG Margins Cause Us to Modestly Lift Our Fair Value Estimate
Following narrow-moat-rated Ametek’s AME third-quarter results, we lift our fair value estimate to $153 from $149. The fair value raise is partly due to a 50-basis-point lift in our midcycle operating margins and partly due to time value of money. Ametek’s electrical instruments group supported our margin increase, as that business has both reached higher margins and has maintained a higher level of performance than in years past. EIG margins rose 360 basis points to 29.5%, materially exceeding our expectations. Despite a slight consolidated sales miss compared with what we had penciled in, EIG sales were still strong, and volume leverage drove its operating margin expansion. Both M&A and organic sales contributed evenly to EIG’s 8% year-on-year sales rise.
Aside from EIG margin increases, the big story in the quarter involved two items: inventory destocking and the acquisition of Paragon. CEO Zapico mentioned that Ametek is observing faster destocking in its automation business than it initially anticipated. We’ll keep an eye on these trends for evidence of a downturn. Clearly, interest rate increases have muted customer automation capital investments, but there are puts and takes in demand. For one, aerospace and defense demand remains solid, as did medical. Other end markets that management called out were semiconductor and power, which should also help offset automation-related headwinds.
As for Paragon Medical, the acquisition increases Ametek’s medtech exposure to over 20% of consolidated sales. This exposure should help create a stable revenue base for Ametek and one that grows sales in the low double digits. Paragon also fits in well with Ametek’s strategy of buying highly engineered instruments, and we like its portfolio of single-use components. The price for the deal seems fair and doesn’t materially affect our fair value estimate, since we generally model unannounced acquisitions.
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