Mettler-Toledo: Strong Cost Control And Pricing Growth Amid Weak Topline Growth

February 15, 2024

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Mettler-Toledo (NYSE:MTD) announced its Q4 FY23 results on February 8, revealing a -13% revenue growth in constant currency. As previously noted in my coverage, I emphasized the challenges faced in the Chinese pharma and biotech markets, leading to a 'Sell' rating. Considering these factors, it is highly probable that Mettler-Toledo will experience another year of muted growth in FY24. Therefore, I maintain the "Sell" rating with the fair value of $810.
Q4 FY23: Strong Cost Control Despite Weak Revenue Growth
In Q4 FY23, Mettler-Toledo reported a -13% decline in revenue growth in constant currency, accompanied by a -21.4% decrease in adjusted operating profit growth, as illustrated in the table below. This weak performance was observed across all regions, with China experiencing a particularly sharp decline of 23% in the quarter.
In my previous coverage, I expressed significant concerns regarding their operations in China. These concerns stemmed from the Chinese government's launch of anti-corruption campaigns in the healthcare sector. Additionally, during the pandemic period, Chinese local governments allocated substantial funds towards massive COVID testing efforts. However, in the post-pandemic period, these local governments had to tighten their national healthcare spending, further impacting Mettler-Toledo's performance. It is noteworthy that China accounted for 19% of the group's revenue in FY23.
Mettler-Toledo Quarterly Results
In the quarter, their gross margin decreased by 80 basis points due to reduced volume, partially offset by some pricing increases. Throughout the full year, I recognize the company's efforts in effectively managing their overall costs during periods of business downturns.
In FY23, despite experiencing a -3% decline in organic revenue growth, Mettler-Toledo managed to maintain a relatively flat adjusted operating margin, as illustrated in the chart below. This indicates commendable cost management efforts by the company amidst challenging market conditions.
Mettler-Toledo 10Ks
There are two main factors contributing to the company's achievement of a stabilized operating margin. Firstly, Mettler-Toledo's products such as laboratory balances and pipettes hold dominant positions in niche markets, affording the company strong pricing power over its main customers. During the earnings call, the company highlighted its anticipation of a further 2% growth from pricing increases in FY24.
Secondly, the company has implemented cost control initiatives and reduced variable compensations since the second half of FY23. These measures have contributed to margin improvements, particularly in low-volume market conditions.
Notably, free cash flow grew by 17% in FY23, primarily attributed to reduced working capital requirements. The company saw significant improvements in its accounts receivable, generating a positive cash flow of $50 million in FY23, compared to an outflow of $83 million in FY22. Mettler-Toledo also repurchased $900 million of its own shares in FY23 and plans to buy back another $850 million in FY24, reflecting robust capital allocation strategies.
Regarding the balance sheet, the company ended FY23 with $2 billion in gross debts and $69 million in cash, resulting in a net leverage of 1.7x, indicating a strong balance sheet.
FY24 Outlook
For FY24, Mettler-Toledo is guiding 1-2% revenue growth in constant currency, with adjusted EPS expected to increase by 4-6% year over year, indicating another year of weak growth for the company. The guidance factors in a notably sluggish growth trajectory for the first half of FY24. Additionally, they anticipate free cash flow of approximately $850 million, representing a conversion of 100% of adjusted net income.
During the earnings call, it was highlighted that the overall laboratory customer base, particularly in the pharma and biopharma industries, remains weak. The current high interest rates are significantly impacting capital funding for these industries, particularly for mid-size and small-size companies.
Furthermore, I do not foresee a near-term recovery in China's healthcare industry. As previously discussed, the ongoing anti-corruption campaign in the healthcare sector is expected to continue posing growth headwinds for the local market.
Assuming another 10% decline in China and 4% growth in the rest of the regions, the overall growth rate would fall within the 1-2% range. The 4% growth in all regions except China is predicated on a 2% price increase and 2% volume growth. The low-volume growth reflects the weak market conditions in the pharma and biopharma end-markets.
As discussed, I estimate that Mettler-Toledo's revenue growth for FY24 will be approximately 1.5%, accompanied by ongoing margin improvement. The projection for free cash flow aligns with their full-year guidance.
On the margin front, the primary drivers are expected to be pricing increases and effective cost management measures, as previously analyzed. During the earnings call, management expressed confidence in achieving 2% pricing growth in FY24. Based on my calculations, the operating margin could expand by 20-30 basis points per year. All other assumptions remain unchanged from the previous model.
With these parameters, the fair value of the company is estimated to be $810 per share, according to my calculations. Considering the current stock price trading around 30 times forward free cash flow, it appears to be quite expensive, especially in light of the strong near-term growth headwinds faced by the company.
Mettler-Toledo DCF - Author's Calculation
Key Risks
In addition to the challenges posed by weak growth in China and a general slowdown in the global pharma and biopharma end-markets, Mettler-Toledo is encountering headwinds in its European business. In Q4 FY23, the company transitioned its European logistics hub, resulting in significant delays in shipments during the quarter. Management expects these delayed shipments to be captured in Q1 FY24.
Furthermore, Mettler-Toledo is facing reduced demand from European food manufacturing segments, as highlighted during the earnings call. The company also noted that packaged food customers are experiencing pressure with reduced profits, which is expected to impact Mettler-Toledo's inspection businesses.
While I appreciate Mettler-Toledo's unique value proposition in the niche market, the company faces significant near-term risks in China and overall weak growth, which are the main headwinds affecting its performance. Considering these factors, I believe the stock price is overvalued. Therefore, I maintain my "Sell" rating for the company, with fair value of $810.

This data comes from MediaIntel.Asia's Media Intelligence and Media Monitoring Platform.

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