Highflier Ametek Needs More Deal Fuel to Stay Aloft

(Bloomberg Gadfly) -- Many of the high-flying industrial stocks this year are household names, such as Boeing Co. or Caterpillar Inc. And then there's Ametek Inc.

Despite its $16 billion market value, the Berwyn, Pennsylvania-based maker of cockpit instruments and motion-control systems doesn't spend much time in the spotlight. Perhaps it should. Shares of the company have been on a tear this year, climbing about 46 percent. That outpaces not only the average return for S&P 500 industrial companies but also the performance of 3M Co. and Roper Technologies Inc., two best-in-class operators with a penchant for acquisitions to which Ametek is often compared.

Ametek shares have been buoyed by spiking organic sales, as demand for industrial products picks up and certain businesses recover from weak oil and gas prices. It doesn't hurt that its takeovers of Rauland-Borg Corp. and Mocon Inc. this year -- two of the largest public deals in Ametek's history at at roughly $550 million combined -- appear to be progressing well. Both were overseen by relatively new CEO David Zapico, something that should help ease fears over the transition from his predecessor, Frank Hermance, who spent almost 17 years at the helm and used an acquisition-heavy strategy to quadruple the company's revenue and expand its market value more than 16-fold. Zapico took over in May of 2016.  

The question now is how Ametek can keep the momentum going. The company has typically commanded a premium over its industrial peers, but even so, it's looking rather pricey. Ametek last week touched its highest multiple of Ebitda since at least the late 1990s. Not a single analyst recommends selling the shares, but on average, all these bullish followers estimate Ametek's share price will reach only $74.50 over the next twelve months. That's about a 5 percent return -- nothing to write home about. The key to surpassing that will be finding more growth-boosting acquisitions, especially if Ametek wants to follow through on its goal of doubling sales by 2022.

CEO Zapico has indicated he's willing to reach beyond Ametek's traditional $50 million to $150 million deal range to achieve  that target, a prime example being the $340 million acquisition of Rauland-Borg in February. At a conference in May, Zapico said he's willing to contemplate deals of as much as $500 million. He'll soon have even more firepower, too: RBC analyst Deane Dray highlighted Ametek as one of the big industrial winners from the Republicans' tax plan, given that 90 percent-plus of its cash is held overseas. The bill passed by the Senate last week would lower the assessment on offshore profits to just 14.5 percent for cash holdings and 7.5 percent for illiquid assets, compared with the previous maximum rate of 35 percent.

Unfortunately for Ametek, many of its would-be targets are expensive, just like itself. And the struggle to stay disciplined in this period of elevated valuations is a problem a little extra money can't fix. Because Ametek's modus operandi is to buy less profitable businesses and improve them, its acquisitions tend to be margin dilutive in the short term. That's fine, but it puts even more pressure on the company to pick the right targets and not overpay.

We'll be watching. 

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

Brooke Sutherland is a Bloomberg Gadfly columnist covering deals and industrial companies. She previously wrote an M&A column for Bloomberg News.

1. Zapico in highlighted a five-year plan of boosting sales to billion. The downturn in industrial and energy markets took a toll on Ametek's sales, however. Asked about his five-year vision in May, he reiterated a goal of doubling the size of the company. 

2. Ametek also agreed to a contingent payment of million tied to the achievement of certain milestones. 

To contact the author of this story: Brooke Sutherland in New York at bsutherland7@bloomberg.net.

To contact the editor responsible for this story: Beth Williams at bewilliams@bloomberg.net.

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