Ametek Earnings: Robust Backlog and Strong Financial Position Means Continued Strong Performance

We see no reason to change our $149 fair value estimate following our review of narrow-moat Ametek’s AME second-quarter results. The quarter was relatively unremarkable, though Ametek did do a bit better on operating margins than we were expecting (by 60 basis points). This helped Ametek produce modestly higher earnings of $1.57 than we hoped to see during the quarter (about a 5% variance). We think there’s a bit of sandbagging in management’s revised full-year guide. Consequently, we model just above the top end of the adjusted EPS guide at $6.30 versus $6.26 at the top end of the range. We suspect we’re simply modeling in a bit more revenue than what the mid-single-digit to high-single-digit revenue full-year guide calls for (we model 9%). Nonetheless, we think the stock remains fairly valued.

During the quarter, Ametek’s consolidated revenue increased just under 9% year on year to $1.65 billion or 5% on an organic basis. Total operating margins increased 130 basis points to 25.4%, good for three consecutive quarters of sequential margin expansion. The electronic instruments group was particularly strong, with reported revenue rising over 10% year on year (or 7% organic growth) and incremental margins of over 39%. These results were due to exceptional performance in Ametek’s aerospace and defense, and ultraprecision technology products housed within EIG, which we think may represent about 30% of EIG’s sales mix.

We expect Ametek’s strong financial performance will carry into the back half of the year as the firm fulfills unfinished orders. The firm reached a record backlog of over 50% of annual sales, compared with its historical average of 30%. Book/bill exceeded 1.0, which was Ametek’s 12th consecutive quarter of earning a ratio above 1. Clearly, demand for Ametek’s products and services remains consistently strong. As Ametek begins to reduce inventories in the second half of the year, we think portions of its backlog should turn into sales.