track record of reinvesting FCF into sensible acquisitions. It’s probably fair to call it a compounder – I’m
surprised it’s never been written up on VIC... this probably never screens as “deep value”, but we think
at these levels it’s definitely “GARP”. There is no big catalyst or, frankly, variant view. We think valuation
is fair in absolute terms, and very attractive vs peers and the overall market. This is an interesting
opportunity to “buy and hold” a quality name and watch it compound earnings over the long-term.
AME makes highly-engineered instrumentation and motion control devices. The company sells into very
diverse mostly-industrial end-markets, per the table below.
AME operates under 2 segments- Electronic Instruments Group, and Electromechanical Group. It’s not
worth delving into each – it’s more important to know that AME is highly decentralized through 45
business units that fall within each of the 2 segments.
AME’s products are high in IP content/technology and generally face limited competition. This allows
the company to report very high EBITDA margins (27% in 2020), which as far as we can tell are only
bested by cult-stock ROP within diversified large cap industrials (and then one could argue ROP is more
of a software/industrial hybrid).
The business model is out of the compounders textbook. The way CEO Dave Zapico articulates it, “the
playbook is to double EPS every 5 years, as we’ve been doing over the last 20 years, with 10% sales
CAGR and 16% EPS CAGR”. The 10% sales CAGR is achieved 4-5% organically and 5-6% inorganically
(rough averages trough the cycle).
AME is an asset-light company that generates very healthy FCF (generally at 110% of net income). M&A
is a core competency, and critical to the investment thesis – AME has a very solid track record of
finding bolt-on niches that fit with the existing strategy, acquiring them accretively, and improving the
acquired business’ margins in the process. All deals are in the $100mm-1bn range, the largest of which is
the recent $925mm purchase of Gatan from ROP. The company’s stated hurdle rate for acquisitions is a
10% ROIC by year 3 post-closing. It’s rare that AME ever acquires an outright bargain. Prices paid are
generally in the 11-14x EBITDA range (pre-synergy), but then these are high-quality businesses that get
even better after AME integrates them. These deals consistently provide better returns than buybacks
(AME tends to trade around 13-14x), and compound FCF to deploy into future acquisitions.
CEO Dave Zapico has been in charge since 2016, taking the helm from Frank Hermance, whom
effectively made AME into what it is over a 20+ yr tenure. Hermance was a highly-respected capital
allocator, and there was some trepidation upon the transition, given that Zapico had more of an ops
background as President of the EIG segment. 4 years later, Zapico put these concerns to rest, building a
