CFA Institute Investment Research Challenge Scranton Team Presentation - Ametek
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CFA Institute Investment Research Challenge Scranton Team Presentation - Ametek

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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.

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.

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    CFA Institute Investment Research Challenge Scranton Team Presentation - Ametek CFA Institute Investment Research Challenge Scranton Team Presentation - Ametek Presentation Transcript

    • HOLD on Ametek (AME)
      Thursday, March 4, 2010
      The University of Scranton Team
      CFA Society of Philadelphia – Investment Research Challenge
      Mike Dwier ‘10, Fred Fuchs ‘10, Tom Prokop ‘10, Blaise Schultheis ‘10, John Walker ’10
      Thurs 3/4/2010
      1
      CFA Philly IRC - Scranton Team
    • Agenda
      Thurs 3/4/2010
      Highlights of a Hold
      Macroeconomic Forecast
      The Margin Expansion Story
      Summary
    • Highlights of a Hold
      Valuation Highlights
      Stock Price History
      Thurs 3/4/2010
      CFA Philly IRC - Scranton Team
      3
      Target of $37.17 is approximately 7% below current market price $40.1.
    • Price and Growth Comparables
      PE Multiple
      Revenue & Earnings 10yr CAGR
      Thurs 3/4/2010
      4
      CFA Philly IRC - Scranton Team
      Source: S&P Compustat. Industry is GICS Electrical Components & Equipment Sub-Industryfirms with market capitalizations above $1 billion. Normalized P/E’s are 5 year normalized (2005-2009).
      Source: S&P Compustat. Sales Growth is 10 year CAGR, 1999-2009. Industry is GICS Electrical Components & Equipment Sub-Industryfirms with market capitalizations above $1 billion.
      At 21x earnings, AME is more expensivethan the 16.5x normalized industry average…
      … because of AME’s historically high earnings growth rate.
    • AME’s Growth Drivers
      What Justifies 21x P/E?
      Growth Drivers
      Robust economic growth
      Gross margin improvement from differentiation.
      Net margin improvement from M&A synergy realization.
      Thurs 3/4/2010
      CFA Philly IRC - Scranton Team
      5
      13% ten year CAGR of earnings
      What is the future of these drivers?
    • Agenda
      Thurs 3/4/2010
      Highlights of a Hold
      Macroeconomic Forecast
      The Margin Expansion Story
      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
    • Where is GDP Now?
      Thurs 3/4/2010
      CFA Philly IRC - Scranton Team
      8
      Real GDP, Table 2
      Bureau of Economic Analysis
      Data published February 26, 2010
      Seasonally Adjusted at Annual Rates
      Quarterly Data from 1947 to 2009
    • Where Does GDP Leadership Come From?
      A Stroll Down Memory Lane
      Percentage Contributions to Real GDP Growth
      Thurs 3/4/2010
      CFA Philly IRC - Scranton Team
      9
      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
    • 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
      Bureau of Economic Analysis
      Data published February 26, 2010
    • Agenda
      Thurs 3/4/2010
      Highlights of a Hold
      Macroeconomic Forecast
      The Margin Expansion Story
      Summary
    • The AME Margin Expansion Story
      Two Types of ME
      Gross profit margin expansion from the switch to differentiated products
      Net profit margin expansion from M&A-related synergies
      Margins Over Time
      Thurs 3/4/2010
      CFA Philly IRC - Scranton Team
      14
    • Gross Margin: Switching to Differentiated Products
      Thurs 3/4/2010
      CFA Philly IRC - Scranton Team
      15
    • Net Margin: Acquisition Synergies
      Conceptual Model
      Hypothetical Exercise:Double Size of AME in 5 Years
      Thurs 3/4/2010
      CFA Philly IRC - Scranton Team
      16
      Average BPS of synergies wrung from acquisitions
      MIASt=ATMIt∗ARtTRt
       
      % of Revenue Eligible for Synergy-related MI
      ARt=ATRt×NAt
       
      MIASt: Margin Improvement due to Acquisition Synergies
      ATMIt: Average Acquisition Target Margin Improvement
      ARt: Acquired Revenue, Period t
      TRt: Total Revenue, Period t
      ATRt: Average Target Revenue, Period t
      NAt: Number of Acquisitions, Period t
       
      Management Distraction?
      “Beware of geeks bearing formulas…”
      - Warren Buffett, Berkshire Hathaway
      Can ATMIt be maintained?
       
    • Net Margin: Acquisition Synergies
      Industry Study
      Thurs 3/4/2010
      CFA Philly IRC - Scranton Team
      17
      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 ATMIt.
       
    • Agenda
      Thurs 3/4/2010
      Highlights of a Hold
      Macroeconomic Forecast
      The Margin Expansion Story
      Summary
    • Summary
      Ametek has relied upon 3 factors to drive growth:
      Robust economic growth
      Gross margin improvement from differentiation.
      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 risksassociated with finding new sources of growth
      Thurs 3/4/2010
      19
      CFA Philly IRC - Scranton Team
    • 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
      Special Thanks To
      Chris Ouimet, Industry Mentor
      The CFA Society of Philadelphia
      Ametek