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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. Agenda. Highlights of a Hold Macroeconomic Forecast

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HOLD on Ametek (AME)

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Hold on ametek ame

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

CFA Philly IRC - Scranton Team


Agenda

Agenda

Highlights of a Hold

Macroeconomic Forecast

The Margin Expansion Story

Summary


Highlights of a hold

Highlights of a Hold

Valuation Highlights

Stock Price History

Target of $37.17 is approximately 7% below current market price $40.1.

CFA Philly IRC - Scranton Team


Price and growth comparables

Price and Growth Comparables

PE Multiple

Revenue & Earnings 10yr CAGR

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.

CFA Philly IRC - Scranton Team


Ame s growth drivers

AME’s Growth Drivers

Growth Drivers

What Justifies 21x P/E?

  • Robust economic growth

  • Gross margin improvement from differentiation.

  • Net margin improvement from M&A synergy realization.

13% ten year CAGR of earnings

What is the future of these drivers?

CFA Philly IRC - Scranton Team


Agenda1

Agenda

Highlights of a Hold

Macroeconomic Forecast

The Margin Expansion Story

Summary


Ame levered to gdp growth

AME Levered to GDP Growth

AME Share Price to Real GDP

AME Sales Growth to Real GDP Growth

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

CFA Philly IRC - Scranton Team


Where is gdp now

Where is GDP Now?

Real GDP, Table 2

Bureau of Economic Analysis

Data published February 26, 2010

Seasonally Adjusted at Annual Rates

Quarterly Data from 1947 to 2009

CFA Philly IRC - Scranton Team


Where does gdp leadership come from

Where Does GDP Leadership Come From?

A Stroll Down Memory Lane

Percentage Contributions to Real GDP Growth

The basis for a sustainable and robust recovery is uncertain.

CFA Philly IRC - Scranton Team


Consumer expectations and consumer confidence

Consumer Expectations and Consumer Confidence

  • Negative Wealth Effect

  • Poor employment outlook

  • Income expectations

  • Tax expectations

CFA Philly IRC - Scranton Team


Sustained consumption what s the function

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

Cash Strapped Consumers

Personal Income - Taxes= Disposable Personal Income (DPI)

DPI – Savings - Debt Service = Expenditure Capabilities

Bureau of Economic Analysis

Data published February 26, 2010

CFA Philly IRC - Scranton Team


Agenda2

Agenda

Highlights of a Hold

Macroeconomic Forecast

The Margin Expansion Story

Summary


The ame margin expansion story

The AME Margin Expansion Story

Two Types of ME

Margins Over Time

  • Gross profit margin expansion from the switch to differentiated products

  • Net profit margin expansion from M&A-related synergies

CFA Philly IRC - Scranton Team


Gross margin switching to differentiated products

Gross Margin: Switching to Differentiated Products

CFA Philly IRC - Scranton Team


Net margin acquisition synergies

Net Margin: Acquisition Synergies

Conceptual Model

Hypothetical Exercise:Double Size of AME in 5 Years

Average BPS of synergies wrung from acquisitions

: Margin Improvement due to Acquisition Synergies

: Average Acquisition Target Margin Improvement

:Acquired Revenue, Period t

: Total Revenue, Period t

:Average Target Revenue, Period t

:Number of Acquisitions, Period t

% of Revenue Eligible for Synergy-related MI

Management Distraction?

“Beware of geeks bearing formulas…”

- Warren Buffett, Berkshire Hathaway

Can be maintained?

CFA Philly IRC - Scranton Team


Net margin acquisition synergies1

Net Margin: Acquisition Synergies

Operating Leverage

Industry Study

  • 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 .

CFA Philly IRC - Scranton Team


Agenda3

Agenda

Highlights of a Hold

Macroeconomic Forecast

The Margin Expansion Story

Summary


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

CFA Philly IRC - Scranton Team


Disclosures

Disclosures

Contacts

Special Thanks To

Chris Ouimet, Industry Mentor

The CFA Society of Philadelphia

Ametek

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.


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