Mettler-Toledo (MTD)
Mettler-Toledo MTD 0.00%↑ is known for making scales for labs, industrials, and supermarkets. The company is a combination of Toledo Scale Company (founded in 1901 in Ohio) and Mettler Instruments (founded in 1945 in Switzerland).
Quality (2/5)
Mettler-Toledo’s long-term revenue growth averages in the mid-single digits (MSD). During the pandemic, growth accelerated to an unsustainable rate above 20% due to increased demand in products for covid testing, like pipettes. The United States accounts for only 37% of total revenue. China, which Mettler-Toledo has been operating in for 35 years, represents about 20% of total revenue.
Sales are cyclical, declining in ‘08-09, ‘12-13, ‘15-16, and ‘20. Sales are expected to decline again this year, according to management’s latest guidance. Despite the cyclical nature of its sales, the company has high earnings certainty due to its share buyback program and expanding margins. Management uses a large amount of leverage to maintain the share buyback, resulting in negative equity on the balance sheet.
Visibility (3/5)
Service and consumables make up about 33% of total sales, which gives some recurring traits to Mettler-Toledo’s business. Customers may need their scales to be recalibrated once a year, for example. This helps cushion the ups and downs of the rest of the business. The core industrial end markets are 25% of total sales and are difficult to forecast.
For this upcoming sales decline, management cites “increased caution” in pharma, biopharma, chemical companies, and food manufacturing, along with “sharply deteriorating” conditions in China. In addition, management notes that the wars going on in Europe and the Middle East create an uncertain outlook for the company. One can see how the complexity of Mettler-Toledo’s operations offers low visibility.
Management frequently uses non-GAAP adjustments, especially “restructuring charges”. I browsed through about ten years of financial statements and, I believe, every single one had a restructuring charge added back to earnings per share (EPS). At that point, it has to be a part of the normal course of business and cannot be added back. There has been a decade-long ERP implementation (Blue Ocean) that never seems like it will be complete.
Management (3/5)
The management team is led by CEO Patrick Kaltenbach since 2021 and CFO Shawn Vadala since 2014. CEO Patrick came from the Life Sciences segment of Becton Dickinson (BDX). Over the last decade, Mettler-Toledo generated $4.75B of cumulative free cash flow (FCF). Acquisitions are not a big part of its capital allocation plan, with about $500M spent over the last ten years. The main priority here is share repurchases and paying debts. According to the cash flow statements, Mettler-Toledo spent $6.2B on share repurchases and $11B on debt repayments over the last decade. Just in the last three years, they spent almost $3B repurchasing stock. MTD’s stock price is currently below the price it traded at any time during 2021-2022, so it has been value-destructive, at least in the short-run.
I calculate a median ROIC of 38% over the last ten years, well above the cost of capital. Stock-based comp is below 1% of total revenue. Insiders own 2.4% of shares outstanding, according to the latest proxy. Mettler-Toledo’s CEO from 1993-2007, Robert Spoerry, owns 1.2% of shares out. It would be nice to see current management have a larger stake in the business. The incentives listed in the latest proxy include Non-GAAP EPS, Net cash flow, Group sales at budgeted currency rates, and Total shareholder returns relative to the S&P 500 Healthcare and Industrials index. I would prefer seeing metrics like GAAP EPS, ROIC, and FCF included.
Demand Creation (4/5)
I found it difficult to determine how Mettler-Toledo creates demand over time, but it is hard to argue with its track record. It seems the added high-touch services help, along with Mettler-Toledo’s sales expertise. Here is management’s take on how it creates demand
“I think people understand this pretty well, but maybe it's an opportunity to remind everyone of our diversity. Like in times like this, when there's uncertainty, our diversity can sometimes be difficult to understand from the outside because of our complexity. But on the inside, it creates a lot of opportunity for us to pivot and to be agile and pursue different opportunities.
And so I think our diversity has always served us well historically, and I'm optimistic it'll kind of continue to serve us well going forward. And then the culture, right? Like we have a tagline inside the company that we've kind of like started to embrace over the last year.
Patrick and I heard it on our annual budget -- global budget tour last summer, and we both loved it.
Now he's using it in a lot of his internal slides, but it's who we are is why we win. Who we are is why we win. And in the end, it's about -- it does come down to culture. It's not a cliche. It's this culture of continuous improvement, this culture of collaboration, this culture of resiliency and agility. And people really caring for each other and trying to work together to -- for the common good. And I really, really believe in that. And I think it's been a differentiator in our story.” - CFO Shawn Vadala
So, Mettler-Toledo creates demand due to its diversity and culture. That sounds like a lot of jargon and rambling on to me. “Who we are is why we win.” But why?
Maybe this explanation from 2021 is a little better
“So first and foremost, we're the market leader, and we would estimate that about 75% of the time we are the global market leader. But at the same time, we're in highly fragmented markets, and we would estimate that our market share is in the 25% type of a range. And as previously mentioned, we have a tremendous amount of diversity in our business in terms of customers, competitors, products, applications and geography. These highly fragmented markets provide a significant opportunity for us to grow organically. And it's one of the reasons why we are so passionate about our organic growth story. We capture this growth opportunity with our Spinnaker sales and marketing program, which we believe is unique compared to our direct competitors. We've been continuously improving Spinnaker for more than 15 years and the program is very well ingrained in our global organization.
In addition, we feel like we have made somewhat of a leapfrog here with Spinnaker during COVID with the acceleration of our digital approaches, which I'll talk a little bit more about later in the presentation. We also support our customers with almost 3,000 service technicians around the world which is the most extensive in our industry. Our service technicians help our customers with uptime, productivity and compliance. And it also helps us stay close to the customer needs in terms of how they see value and what their expectations are. We also have a long history of innovation and are generally known as the technology leader in our industry. And finally, as I mentioned before, we have a strong culture of execution and agility.” - CFO Shawn Vadala
Being the go-to brand for scales and analytical equipment for over a hundred years creates trust for customers. Scales may appear to be a low-technology, commodity-like product, but customers need accurate scale readings. An inaccurate scale could lead to poor product quality or costly downtime. Mettler-Toledo has 25% market share on average across all of its end markets, and its large sales force spanning all regions of the globe is difficult for competitors to match.
Valuation & Pricing (2/5)
I estimated lower revenue growth than historical averages for the next couple of years before a return to trend in the remaining years. Mettler-Toledo’s EBIT margin expansion, as seen in the Koyfin chart at the beginning of this post, is remarkable. It almost seems impossible to be able to maintain that level of expansion, but I set EBIT margin to improve to 32% from 30% today. My cost of capital is relatively high due to its large exposure to emerging markets (about one-third of total sales). My estimated value per share comes out to $499.
Pricing does not look as bad due to the stock’s 38% drawdown that MTD is currently in (compared to the SPY’s 4%). When compared to itself and peers, I think a 25X multiple is fair for MTD. With EPS approaching $40.00, I get a price target of $1,000.
When combining my valuation and pricing analysis, I target a buy-below price of $750/share, which is about 29% lower than today’s price. I am not sure I would personally even want to buy this one even if it gets down there. It is not the best match for my investment criteria.
Risks
What could possibly go wrong for Mettler-Toledo? The high use of leverage to buy back shares at over 40X earnings could prove to be value destructive. What if management is focusing too much on cost cutting and buying back shares that it is missing organic innovation? Some of Mettler-Toledo’s product seem commodity-like to me, so given the high returns on capital, one could potentially see a competitor try to enter the market with lower-priced products. Stock market participants could create a narrative that Mettler-Toledo cut so many costs and wasted so much cash doing share buybacks that it missed the boat with new innovations or keeping competitors at bay. Management is incentivized by non-GAAP EPS, so they will likely keep buying back shares at outrageous multiples in order to cash-in on bonuses. In addition, the constant use of non-GAAP adjustments and the never-ending ERP implementation is not a good look, in my opinion. It makes me worry that there are some other schemes going on that we do not know about.
To conclude, Mettler-Toledo scores a 14/25 in my latest review of the company. See where it stacks up with the other companies I follow, now on Tableau!
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Disclosure:
I do not own MTD stock. Please see my holdings disclosure located in the Google Sheets link.
Any views or opinions are my own. I do not represent a firm. I am not giving financial advice. The stocks that I write about could increase in value, lose value, or stay the same value. Investing involves risk and losses can occur. Some stocks I write about may not be appropriate for you and you should consult a professional investment advisor. Data presented is from sources I believe to be reliable. The opinions and commentary presented reflect my best judgement at this time and may include “forward-looking statements”, all of which are subject to change at any time without obligation to update them. Actual future results may be different than my expectations.
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