Rising more than 300% in the last decade and 7,000% since its 1997 initial public offering, precision instrument specialist Mettler-Toledo (MTD 0.42%) may be one of the most successful stocks few investors know about. Briefly a 100-bagger -- meaning that its share price rose more than 100 times in value -- Mettler-Toledo has a long history of stomping the broader market.
However, with the company's sales growth slowing over the last year and turning to a 4% decline in the most recent quarter, its share price has been sent down 32% by the market.
So, is Mettler-Toledo's incredible run coming to an end? Or is this the perfect opportunity to pick up shares of this steady-Eddie business at a rare discount?
Here's why all signs point to the latter.
Maintaining a leadership position in its fragmented niche
Mettler-Toledo is home to over 5,400 patents, providing specialized precision instruments and services to various end markets, including the manufacturing, life sciences, chemicals, and food industries. It divides its sales into three distinct groups:
- Laboratory instruments (57% of sales): Balances, pipettes, titrators, thermal analysis systems, pH meters, its LabX software platform, automated chemistry solutions (for chemical and drug discovery), and process analytics used during production.
- Industrial instruments (38%): Industrial weighing instruments, terminals (data collection and integration during manufacturing), vehicle scales, industrial software, and product inspection (X-ray, metal detectors, and more).
- Retail weighing solutions (5%): Food weighing and labeling at supermarkets or other retailers.
While focused on its precision instrument niche, Mettler-Toledo supplies its customers' entire value chain. Whether it is research and development (R&D) and quality control, production and filling, packaging and logistics, or retail weighing, the company's instruments are essential to businesses in more than 140 countries.
In addition to this product and end market diversification, Mettler-Toledo's sales are also well balanced by geography, with 41% coming from the Americas, 26% from Europe, and 33% from Asia and the rest of the world. This widespread geographic diversification typically protects the company from sales fluctuations. However, a dramatic 25% sales decline in China during the third quarter made the market worry about Mettler-Toledo's stock.
Despite this temporary slowdown in China, there are two key reasons to expect the company to return to its growth days of yore -- albeit maybe at just a reasonable 6% clip, as CEO Patrick Kaltenbach expects over the long term.
First, the company's instruments are critical for two of the hottest end markets out there right now: semiconductors and lithium-ion batteries (as well as electric vehicle components in general). Second -- much as with Rockwell Automation -- Mettler-Toledo's software and automation capabilities are critical in bringing manufacturing and production into the modern era.
Last but not least, I'm confident Mettler-Toledo will return to its mid-single-digit growth rates thanks to its market leadership position -- an advantage that can be quantitatively seen through its immense profitability.
Best-in-class profitability and cash returns to shareholders
With a return on invested capital (ROIC) of 44% -- the 10th best in the S&P 500 index -- Mettler-Toledo's immense profitability indicates a wide moat that allows the company to maintain strong pricing power. Measuring a company's profitability compared to its debt and equity, ROICs are vitally important to investors, as stocks with higher percentages tend to outperform their peers -- as this article explains.
Buoyed by this top-tier profitability and an ability to convert all this net income into free cash flow (FCF), Mettler-Toledo continuously returns cash to shareholders through steady share buybacks. In the last decade, the company has reduced its share count by 26% -- buying back the equivalent of 3% of its outstanding shares annually.
MTD Shares Outstanding data by YCharts
To highlight the power of these buybacks, consider that if the company's net income had remained the same for 10 straight years, its earnings per share (EPS) would have risen by 36% due to this lower share count. Consistently using most (if not all or more) of its FCF on share repurchases, Mettler-Toledo and its currently discounted valuation are a potent duo right now.
A rare discount in valuation
Trading at 28 times FCF, Mettler-Toledo isn't dramatically cheap. However, a steady-Eddie investment with Mettler-Toledo's market-beating ways, best-in-class profitability, and leadership positioning is worth noting. In other words, the company is one of those stocks that never seem to go on sale.
MTD Price to Free Cash Flow data by YCharts
Except it finally has -- trading at its lowest price-to-FCF ratio since 2016 and roughly 25% below its average valuation.
Bolstered by its tremendous FCF generation and subsequent buybacks, the company is well positioned to handsomely reward shareholders as it continues to pick up shares at a valuation it hasn't seen in ages. Pair these increasingly powerful buybacks with the company's strong ROIC and leadership position, and we have an unstoppable stock to buy hand over fist before we turn the page on 2023.
