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.

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CFA Institute Investment Research Challenge Scranton Team Presentation - Ametek

  1. 1. HOLD on Ametek (AME)<br />Thursday, March 4, 2010<br />The University of Scranton Team<br />CFA Society of Philadelphia – Investment Research Challenge<br />Mike Dwier ‘10, Fred Fuchs ‘10, Tom Prokop ‘10, Blaise Schultheis ‘10, John Walker ’10<br />Thurs 3/4/2010<br />1<br />CFA Philly IRC - Scranton Team<br />
  2. 2. Agenda<br />Thurs 3/4/2010<br />Highlights of a Hold<br />Macroeconomic Forecast<br />The Margin Expansion Story<br />Summary<br />
  3. 3. Highlights of a Hold<br />Valuation Highlights<br />Stock Price History<br />Thurs 3/4/2010<br />CFA Philly IRC - Scranton Team<br />3<br />Target of $37.17 is approximately 7% below current market price $40.1.<br />
  4. 4. Price and Growth Comparables<br />PE Multiple<br />Revenue & Earnings 10yr CAGR<br />Thurs 3/4/2010<br />4<br />CFA Philly IRC - Scranton Team<br />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).<br />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.<br />At 21x earnings, AME is more expensivethan the 16.5x normalized industry average…<br />… because of AME’s historically high earnings growth rate.<br />
  5. 5. AME’s Growth Drivers<br />What Justifies 21x P/E?<br />Growth Drivers<br />Robust economic growth<br />Gross margin improvement from differentiation.<br />Net margin improvement from M&A synergy realization.<br />Thurs 3/4/2010<br />CFA Philly IRC - Scranton Team<br />5<br />13% ten year CAGR of earnings<br />What is the future of these drivers?<br />
  6. 6. Agenda<br />Thurs 3/4/2010<br />Highlights of a Hold<br />Macroeconomic Forecast<br />The Margin Expansion Story<br />Summary<br />
  7. 7. AME Levered to GDP Growth<br />AME Share Price to Real GDP<br />AME Sales Growth to Real GDP Growth<br />Thurs 3/4/2010<br />CFA Philly IRC - Scranton Team<br />7<br />Sources: Yahoo Finance, Historical Prices;<br />Economagic, Real GDP Chained Weighted In 2005 Dollars<br />Sources: S&P Compustat, AME Sales; <br />Economagic, Real GDP Chained Weighted In 2005 Dollars<br />
  8. 8. Where is GDP Now?<br />Thurs 3/4/2010<br />CFA Philly IRC - Scranton Team<br />8<br />Real GDP, Table 2<br />Bureau of Economic Analysis<br />Data published February 26, 2010 <br />Seasonally Adjusted at Annual Rates <br />Quarterly Data from 1947 to 2009<br />
  9. 9. Where Does GDP Leadership Come From?<br />A Stroll Down Memory Lane<br />Percentage Contributions to Real GDP Growth<br />Thurs 3/4/2010<br />CFA Philly IRC - Scranton Team<br />9<br />The basis for a sustainable and robust recovery is uncertain.<br />
  10. 10. Consumer Expectations and Consumer Confidence<br />Negative Wealth Effect<br />Poor employment outlook<br />Income expectations<br />Tax expectations<br />Thurs 3/4/2010<br />CFA Philly IRC - Scranton Team<br />10<br />
  11. 11. Sustained Consumption: What's The Function?<br />Strong Q3 2009 consumption data:Up 1.9% sequentially<br />Consumption contributed over 86% of headline GDP change in Q3 2009.<br />Q4 Consumption: the “clunker” hangover<br />
  12. 12. Cash Strapped Consumers<br />Personal Income - Taxes= Disposable Personal Income (DPI)<br />DPI – Savings - Debt Service = Expenditure Capabilities<br />Thurs 3/4/2010<br />CFA Philly IRC - Scranton Team<br />12<br />Bureau of Economic Analysis<br />Data published February 26, 2010 <br />
  13. 13. Agenda<br />Thurs 3/4/2010<br />Highlights of a Hold<br />Macroeconomic Forecast<br />The Margin Expansion Story<br />Summary<br />
  14. 14. The AME Margin Expansion Story<br />Two Types of ME<br />Gross profit margin expansion from the switch to differentiated products<br />Net profit margin expansion from M&A-related synergies<br />Margins Over Time<br />Thurs 3/4/2010<br />CFA Philly IRC - Scranton Team<br />14<br />
  15. 15. Gross Margin: Switching to Differentiated Products<br />Thurs 3/4/2010<br />CFA Philly IRC - Scranton Team<br />15<br />
  16. 16. Net Margin: Acquisition Synergies<br />Conceptual Model<br />Hypothetical Exercise:Double Size of AME in 5 Years<br />Thurs 3/4/2010<br />CFA Philly IRC - Scranton Team<br />16<br />Average BPS of synergies wrung from acquisitions<br />MIASt=ATMIt∗ARtTRt<br /> <br />% of Revenue Eligible for Synergy-related MI<br />ARt=ATRt×NAt<br /> <br />MIASt: Margin Improvement due to Acquisition Synergies<br />ATMIt: Average Acquisition Target Margin Improvement<br />ARt: Acquired Revenue, Period t<br />TRt: Total Revenue, Period t<br />ATRt: Average Target Revenue, Period t<br />NAt: Number of Acquisitions, Period t<br /> <br />Management Distraction?<br />“Beware of geeks bearing formulas…”<br />- Warren Buffett, Berkshire Hathaway<br />Can ATMIt be maintained?<br /> <br />
  17. 17. Net Margin: Acquisition Synergies<br />Industry Study<br />Thurs 3/4/2010<br />CFA Philly IRC - Scranton Team<br />17<br />Operating Leverage<br /><ul><li>In this industry, larger companies typically have less operating leverage
  18. 18. There are less fixed costs (SG&A) in larger companies
  19. 19. Since most acquisition synergies come from SG&A, this means a lower potential for ATMIt.</li></ul> <br />
  20. 20. Agenda<br />Thurs 3/4/2010<br />Highlights of a Hold<br />Macroeconomic Forecast<br />The Margin Expansion Story<br />Summary<br />
  21. 21. Summary<br />Ametek has relied upon 3 factors to drive growth:<br />Robust economic growth<br />Gross margin improvement from differentiation.<br />Net margin improvement from M&A synergy realization<br />These factors cannot be relied upon going forward to deliver the same growth.<br />AME has a solid and experienced management team<br />Yet a 21x P/E multiple is still rich given the risksassociated with finding new sources of growth<br />Thurs 3/4/2010<br />19<br />CFA Philly IRC - Scranton Team<br />
  22. 22. Disclosures<br />Thurs 3/4/2010<br />Ownership and material conflicts of interest:<br />The author(s), or a member of their household, of this report does not hold a financial interest in the securities of this company. <br />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. <br />Receipt of compensation:<br />Compensation of the author(s) of this report is not based on investment banking revenue.<br />Position as a officer or director:<br />The author(s), or a member of their household, does not serves as an officer, director or advisory board member of the subject company.<br />Market making:<br />The author(s) does not act as a market maker in the subject company’s securities.<br />Ratings guide:<br />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.<br />Investment Research Challenge and Global Investment Research Challenge Acknowledgement:<br />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.<br />Disclaimer:<br />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. <br />Contacts<br />Special Thanks To<br />Chris Ouimet, Industry Mentor<br />The CFA Society of Philadelphia<br />Ametek<br />

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