AME - Ametek: Over-Reliance On Acquisitions Deteriorates FCF

2024-06-18 06:32:10 ET

Summary

• Ametek stocks are currently trading well above their fair market price.
• The over-reliance on acquisitions might represent a burden for the company, as its business model requires continuous reinvestments which deteriorate return on investments.
• Despite growth potential, current prices suggest a negative alpha of -3.4% due to overvaluation.

Executive Summary

Ametek ( AME ) stocks are currently trading well above their fair market price.

Ametek's business model heavily relies on acquisitions to deliver growth. Despite the great performance registered in the past years, in the future, the over-reliance on acquisitions might represent a burden for the company, as its business model requires continuous reinvestments which deteriorate return on investments, especially if acquisitions don’t deliver expected results.

Assuming Ametek continues delivering positive results via its aggressive growth strategy, we expect it to further expand its market share while improving profitability thanks to its strong presence in the niche markets it serves.

However, growth won’t come cheap, we expect Ametek’s reinvestment needs to remain well above the industry average values, partially offsetting the benefit of greater profitability when it comes to free cash flows generation.

Despite the strong growth ahead, at current prices, our assumptions suggest that Ametek’s risk-reward profile will deliver a negative alpha of -3.7% as the implied return of 4.9% to justify the current price is below its expected required rate of return equal to 8.6%....

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