Mettler-Toledo knows its end markets

In economics, the multiplier effect describes how an injection of new capital, be it in the form of exports or government spending, can boost national income because a proportion of the capital will itself be spent, creating income for businesses and individuals. Unfortunately, that didn’t play out during the early part of the pandemic because much of the new capital that made its way into the economy was earmarked for businesses effectively on life support due to earlier government intervention to ward off the virus.

Well, 20 months on and we’re apparently none the healthier, while the number of corporate insolvencies recorded in the UK rose by a quarter during Q3. But there might be a lesson in all of this for investors, or at least a steer on which business models have proved resilient during a crisis – a key consideration, as the pandemic has shown.

It would certainly apply to Mettler-Toledo International (US:MTD), a manufacturer of precision instruments for use in laboratory, industrial and food retailing applications. Despite a fall in aggregate industrial demand, the Ohio-based group delivered a 7 per cent rise in net earnings to $603m (£447m) in 2020, while registering an adjusted operating profit margin of 27.2 per cent, a near-tripling of that metric since the turn of the millennium. Return on assets stood at 19.3 per cent, two percentage points in advance of the long-term average. The momentum has continued into Q3 2021, with sales up by a third on the comparable period last year.

Why has Mettler-Toledo weathered the storm while many other industrial manufacturers have struggled? It isn’t simply down to diversification; there has been no shortage of companies that have failed to match their pre-pandemic sales figures despite selling into a range of markets. The difference is that Mettler-Toledo has tailored its business model to enable it to shift the segments it focuses on, so last year it profited from the growth in life sciences, coupled with the inherent defensive qualities in the food production sector.    

You might think that the group’s exploitation of these end markets through 2020 amounts to little more than kismet, but that is belied by the ongoing evolution of the sales function, including the use of advanced analytics to determine which end markets were most likely to be pandemic-resilient.

There may be many moving parts to the business, but it nimbly transformed what it terms a “Go-to-Market approach” by quickly adopting to telesales to address the lack of direct access to customer sites. Meanwhile, after-sales channels, an important – and profitable - function of the business, were efficiently maintained through a combination of webinars, seminars and online training.

The flexibility of the sales function, therefore, is certainly a major plus point, to say nothing of the group’s wider – and ever deepening - geographical spread (it was one of the first manufacturers to reopen in China after the lockdown).

That said, there are some vulnerabilities evident in the balance sheet. It’s predictable – perhaps even desirable – that a high proportion of the asset base would be given over to intangible assets, but at the end of September accounts receivables stood at half of current assets. Admittedly, the rate of receivables is consistent with historical measures and there has been no slowdown in stock turnover, so relatively sluggish remittance may simply point to entrenched relationships with its clientele. Indeed, days-of-sales-outstanding shrank through the year.

The net debt position, though primarily long-dated, is slightly more troubling; at $1.51bn it represents eight times shareholders’ equity, hardly a reassuring multiple given that it has been in an uptrend since 2014. Debt issuance was in line with debt repayment through 2020, but interest expenses, though relatively modest, having been ticking up.

Nonetheless, management still felt able to repurchase $775m in common/preferred stock in the year. Meanwhile, free cash flow came in at $632m against $509m in the year prior to the outbreak, and the group is confident of maintaining its net debt-to-Ebitda ratio at approximately 1.5 times.

Constant currency sales and adjusted EPS growth for 2020 have been pitched at 12 and 13 per cent, respectively. For that, along with the prospect of another $1bn in share buybacks, potential investors are now being asked to pay 3 per cent in advance of the average broker target price of $1,498, although given the high level of institutional ownership (and low levels of activism), those shares are tightly held.

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