AMETEK: Headwinds Likely To Persist Into 2025 (NYSE:AME)

In regard to the beneficial ownership, I have to admit that I feel discouraged by the low stake that management has in the company. Among all 17 directors and executive officers, they own less than 1% of the common stock.

Headwinds And Pressures in Q2 2024

As always, I like to start with the dessert.

The main challenge that the company is facing comes from inventory destocking across its OEM customer base, which had a direct impact on sales in the automation and engineered solutions segments.

I am concerned about this destocking activity, as there are no signs indicating a shift in this trend. Initially, management expected a slowdown in destocking activities for the second half of this year. However, in Q2, they indicated that this could persist through the rest of 2024.

In my view, the recent destocking initiatives from their OEM customers make sense, given that their supply chains have stabilized since the COVID-19 pandemic, the 6-day Suez Canal blockage in 2021, and the wars in Ukraine and Palestine. With a more stable supply chain, their customers are adjusting their inventories closer to the demand levels. This means a reduction in their stockpiles, leading to a slowdown in orders for AMETEK.

This impact was most pronounced in the automation business, which saw a 2% reduction in sales growth expectations, and Paragon Medical, which saw a 1% reduction.

In regard to their sales growth, despite the 5% YoY increase, most of it was driven by acquisitions rather than organic sales. This makes me sweat, especially when considering that acquisitions contributed 8% to the company’s sales growth.

This means that without the contribution from recently acquired businesses, total sales growth would have been negative.

Another headwind comes from their power and industrial customers, who have adopted more cautious spending strategies, leading to delays in project approvals. According to management, this is expected to have a 1% reduction in sales growth in their EIG segment.

Not Everything Was Bad In Q2

The company managed to beat EPS expectations by 1%, with sales and operating income increasing in the mid to high single digit.

Their operating margin increased by 40 basis points YoY, to 25.8%. EBITDA also increased by 10% YoY, reaching $545 million, with a healthy margin of 31.4%

In regard to the two main segments, operating income in the EIG segment increased by 14%, mainly driven by the aerospace, defense, and process businesses. Sales in the EMG segment also increased, totaling $581.2 million.

However, as I mentioned in the previous section, this was mainly driven by acquisitions rather than organic growth.

Outlook

Let’s start by having a quick look at the price action in the weekly chart below.

Even without drawing any trend line, there has been a clear uptrend over the past 4 years, with the share price increasing over 200% since the lows in April 2020.

Considering that management lowered the full-year guidance in Q2 2024, the share price dropped by over 10% during the week of the earnings release. However, the RSI doesn’t show any signs of overbuying, or overselling activity, which makes me believe this was a healthy correction.

In regard to the new (downgraded) guidance, management expects 2024 sales to increase between 5-7% YoY, which is 3-4% less than what they initially forecasted. In my view, this is not a catastrophic decrease, however, I am concerned with a potential cool off of shareholder excitement, which could potentially lead to a selloff if the actual 2024 results are below the lowered guidance.

In regard to their financials, both EBITDA, net income, and operating income have increased consistently since 2020, supporting the uptrend in the weekly chart above. However, this doesn’t necessarily provide insight into the company’s future or whether the headwinds will persist into 2025.

Considering that acquisitions account for a significant amount of their growth, I considered including below a comparison of their total debt and current assets.

Despite an increase in total debt over the past years, I am not overly concerned given that total current assets have also increased, and are at a comparable level.

Cash-wise, both free cash flow and operating cash flow have been increasing over the past years, which I see as a positive factor, especially considering that free cash flow in 2023 totaled $1.6 billion.

My investment style places significant weight on recent insider buying transactions in the open market by key executive officers and directors. However, a quick look at the recent insider activity reveals a significant amount of selling.

In theory, selling activity doesn’t mean much for the future of the share price. In practice, I found this to not be the case, especially when CEOs, CFOs, SVPs, and EVPs are selling shares.

However, despite the recent selling activity, I don’t believe the share price will drop significantly below the $160 level. The financials look quite solid, with a healthy amount of free cash flow, and a strong growth over the past few years. Even though this growth could be attributed to acquisitions, the total debt of the company is close to its total current assets, which I view as a positive sign of solvency.

The main reason for my Hold rating is the headwinds showing no signs of slowing by the end of 2024 and likely continuing into 2025. An interest cut rate by the Fed could have a positive impact on consumer spending; however, I believe this will have a delayed effect, and we won’t see any effects until Q1 2025.

Conclusion

To conclude, I believe AMETEK has solid financials, but the current headwinds could persist into 2025, which could lead to shareholder excitement cooling off, leading potentially to a selloff if the company misses the 2024 full-year guidance.

The destocking trend among their OEM customer base could extend through the end of 2024, which could negatively affect growth in the automation and medical markets.

Additionally, the fact that acquisitions are driving much of their recent growth, raises some concerns about the long-term sustainability of this strategy.

Despite EBITDA growth and improved margins, management downgraded guidance, and the recent insider selling activity also makes me sweat.

Given these factors, my rating is a Hold until there are clear indications that some of the headwinds are slowing down.