In spring of 2021, I called Mettler-Toledo International Inc. (NYSE:MTD) a quality, but expensive, name. While I believed that the business deserved a premium given the quality of the business, a 50 times earnings multiple was a bit too much, as the earnings yield barely surpassed prevailing Treasury yields at the time.
Amidst a stable share price performance (on a net basis) over the past two years, while the business has seen rather spectacular growth, expectations have been reset a great deal (albeit in a different interest rate regime).
About Mettler-Toledo
Mettler-Toledo is a manufacturer and marketer of precision instruments which are used in laboratory, industrial and food retailing applications. Two years ago, the company posted its results across two divisions: laboratory solutions and industrial solutions, as the leadership position in these segments have stood at the foundation of the long term value created for shareholders. By now the company reported sales across three divisions with the lab being responsible for just over half of sales, industrial responsible for nearly 40% of sales and food retail making up just 6% of sales, based on the most recent quarterly sales numbers.
After all, this was just a $30 stock in the early 2000s, with shares breaking the $1,000 mark in 2020, as shares rose to $1,200 in April 2021. In the decade before, the company grew revenues by around 35% to $3.1 billion, which is decent, but nothing spectacular. This, however, was complemented by operating margins being up 5 points to 25% of sales, providing additional earnings growth on top of that. Furthermore, the company bought back a quarter of its shares over this period of time, allowing earnings per share to triple over a ten-year period.
With shares having risen about a factor of 10 times over the same period of time, investors have been aggressive to price in these advancements with continued higher earnings multiple being attached to the business, as the company earned about $25 per share in 2020.
The company operated with a $1.2 billion net debt load, not a worry at all as adjusted operating profits totaled $841 million in 2020. While I appreciate the quality of the business, the near 50 times earnings multiple has been far too demanding for me, and stood at the foundation of a neutral take.
Trading Stagnant
After voicing a neutral take in 2021, shares rose to levels as high as $1,700 by the end of 2021, fell back to the $1,000 territory in 2021, traded at $1,500 again early this year, with shares now trading at $1,270 per share.
This means that shares have not seen any gains over the past two years on a net basis, albeit with some volatility. Earlier this year, the company posted 2022 sales, a year in which the company had grown sales to $3.9 billion, a decent result. Operating earnings came in at $1.07 billion, for margins in excess of 27%, with net earnings of $873 million working down to a near $39 per share earnings number.
Long-term debt ticked up to $1.9 billion, due to organic net capital spending and some share buybacks, no big issue with EBITDA trending at $1.2 billion. With the company guiding for 2023 sales to rise by 5% in local currency terms, adjusted earnings are seen between $43.55 and $43.95 per share. Based on a current share price of $1,270, this has reduced the earnings multiple to 27 times, still very high, certainly in this interest rate environment.
In May, Mettler-Toledo posted first quarter sales to be up 3%, although that this included a 4% headwinds from the strong dollar. GAAP earnings improved by nearly a dollar to $8.47 per share, all while net debt ticked up to $2.0 billion. It was comforting to see that the company maintained the full year guidance, in fact, it hiked the lower end of the earnings range by ten cents.
A Lot More Friendly
Amidst a solid performance of the business, Mettler-Toledo International Inc. valuations have continued to come down, as EBITDA has topped the billion mark here, for reasonable leverage ratios. Compared to the situation early in the spring of 2021, the earnings power of the business has improved a great deal from about $25 per share to $44 per share, all while shares trade at largely the similar level, making that earnings multiples have come down a great deal.
This is really impressive and interesting, as a roughly 2% earnings yield in spring of 2021 has advanced to nearly 4%, most likely largely due to the fact that risk-free rates have moved up to levels as high as 5% at the moment of writing.
The thesis on Mettler-Toledo has remained intact, as demand for precision instruments remains high, certainly the high quality products offered by the business, which furthermore benefits from intimate and deep relationships with customers.
The company has been a constant and rather aggressive buyer of its stock, and quite frankly has done so without too much consideration of the stock price which is a negative in my eyes, although I like the capital discipline in the sense that the company focuses on growth on an organic basis, not requiring (expensive deals) to grow the footprint of the business.
What Now?
The reality is that I am warming up to Mettler-Toledo International Inc. here, as I recognize the quality of the business. Being able to buy such a quality name at a yield on par with risk-free rates would be a great opportunity. While risk-free rates moved up to 5%, a 4.5% earnings yield translates into a $1,000 per share entry target, which makes for a nice entry target in my view (as I recognize that shares traded as low as $1,070 in September of last year).
Hence, Mettler-Toledo International Inc. stock definitely appears on my watch list. I will be watching with great interest to see potential further declines in the shares, with a full intention to buy into the quality name at levels around the $1,000 mark if that should arise later this year.
Read the full article here