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AME

Avoid AMETEK Stock For Now

AMETEK stock (NYSE: AME) is up roughly 10% since the start of the year and has recovered around 85% from its March lows. AME stock faces downside risk as its YTD revenue has declined by 15% due to a fall in demand across major markets. Further, the ongoing Covid-19 crisis and the economic uncertainty is likely to result in lower spending by aerospace and automation industries, which are major revenue drivers to AME. This is likely to impact the revenue growth rate of the company as sales-cycles are expected to take more time than usual, and this is likely to hit profitability – leading to a drop in the stock price.

Following a large 85% rise since the March 23 lows of this year, at the current price of $109 per share, we believe AMETEK stock, a global manufacturer of electronic instruments and electromechanical devices, has reached its near term potential. AME stock has rallied from $58 to $109 off the recent bottom compared to the S&P which moved 54% over the same time period, despite its YTD revenues plunging by nearly 15%. Gradual improvement in demand for automotive and aerospace products has helped the stock in beating overall markets. Moreover, the stock is up 50% from levels seen in early 2018, over two years ago. AMETEK stock has fully recovered to the level it was before the drop in February due to the coronavirus outbreak becoming a pandemic. Notably, the stock is up 10% from the beginning of the year while the broader market has gained around 5%. This seems to make it fully valued as, in reality, demand and revenues will likely be lower this year than last year. Our dashboard ‘Why AMETEK Stock moved 50%? provides the key numbers behind our thinking, and we explain more below.

Some of the stock price rise over the last 2 years is justified by the roughly 20% growth seen in AMETEK’s revenues from $4.3 billion in 2017 to $5.2 billion in 2019. This combined with a 5.4% growth in AMETEK’s net income margin and a 1.1% reduction in share count due to share repurchases worth $386 million, helped AMETEK’s earnings per share surge by 28% over the same time period, providing a boost to the company’s stock price.

Finally, AMETEK’s P/E ratio remained stable around 25x between 2017-2019. While the company’s P/E has now increased to 29x, it seems to be overvalued when the current P/E is compared to levels seen in the past years – P/E of 25x between 2017 and 2019. We believe there is a possible downside risk for AMETEK’s multiple when compared to levels seen over the recent years, and the stock is unlikely to see much upside after the recent rally and the potential weakness from a recession-driven by the Covid outbreak. 

How Is Coronavirus Impacting AMETEK’s Stock?

The global spread of coronavirus has affected industrial and economic activity across the world which is likely to adversely impact the company’s revenues across all operating segments, particularly automotive and aerospace segments. The economic slowdown is likely to reduce expenses by companies across industries globally – considerably hurting the demand for the company’s offerings. Notably, a slump in demand for air travel will considerably hurt demand for AMETEK’s aerospace products. Additionally, the companies will postpone/suspend their spending in a bid to tackle the near-term shock to consumer spending. In general, we expect the overall demand to be lower in FY’2020 due to uncertainty resulting from the outbreak of coronavirus which leads us to believe that the stock is currently overvalued.

The actual recovery and its timing hinge on the broader containment of the coronavirus spread. Our dashboard Trends In U.S. Covid-19 Cases provides an overview of how the pandemic has been spreading in the U.S. and contrasts with trends in Brazil and Russia. Following the Fed stimulus — which set a floor on fear — the market has been willing to “look through” the current weak period and take a longer-term view. With investors focusing their attention on 2021 results, the valuations become important in finding value. Though market sentiment can be fickle, and evidence of an uptick in new cases could spook investors once again.  

What if you’re looking for a more balanced portfolio instead? Here’s a high-quality portfolio to beat the market, with over 100% return since 2016, versus 55% for the S&P 500. Comprised of companies with strong revenue growth, healthy profits, lots of cash, and low risk, it has outperformed the broader market year after year, consistently.

 

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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