AMETEK: Compounder Forged in the Crucible of the Depression (Part One)

Founded nearly 100 years ago, AMETEK has evolved from a bankrupt electric business into an industrial juggernaut with dominant share in niche industrial markets

A “High-Performance Conglomerate”

For years the legendary Mark Leonard at Constellation Software has labelled AMETEK a “High-Performance Conglomerate” and urged his management team to carefully study the business’ approach to M&A and overall strategy. But decades earlier, AMETEK’s predecessor company—American Machine and Metals—went bust in the Great Crash of 1929. It was from these humble and inauspicious beginnings that AMETEK ultimately emerged, becoming a dominant niche industrial player now with an enterprise value approaching $30 billion and a track record that has trounced the S&P 500 for decades.

A Walk Down Memory Lane: Acquisition-Led Growth from the Early Days

American Machine and Metals emerged from bankruptcy in 1930 and was listed on the New York Stock Exchange under the ticker AME . The new business focused on manufacturing and selling commoditized industrial parts across a broad range of end markets, from laundry machines to pharmaceutical centrifuges. By 1935, the company had achieved sufficient profitability to pay its first dividend.

In 1944, the company acquired US Gauge for $3 million, significantly increasing scale and opening the door to a growing market for pressure and temperature gauges, a business AMETEK still dominates.

In 1955, Lamb Electric was acquired for $34 million. The Lamb Electric takeover marked a significant transition, as the combined company began focusing on precision components and niche electric motors for small appliances, deemphasizing its history of commoditized manufacturing. The Lamb Electric brand continues today as a dominant brand of bypass motors used in vacuums and other applications.

It was also in 1955 that Julius Rosenwald—the man who bought a controlling stake in Sears Roebuck decades earlier and turned it into America’s leading retailer—invested a significant stake in American Machine and Metals.

Rosenwald cemented the company’s push deeper into niche products, as the business divested a mining operation in 1958 and changed its name to AMETEK that same year in recognition of its reinvention. Through the 1960s and 1970s, AMETEK continued its acquisition push and by 1980 achieved $400 million in sales of highly engineered parts across a broad range of global end markets.

New CEO John Dandalides determined the business was overly diversified and in 1988 executed a tax-free spin-off of its slower growth non-core businesses, named KETEMA (AMETEK spelled backwards). Rosenwald, who owned roughly 20% of AMETEK at the time, received a commensurate stake in the spin-off; he ultimately executed an LBO of KETEMA, representing the first buyout of what became his family office, American Securities (now a major private equity player that most recently raised a $9 billion fund in 2019).

In 1990, Walter Blankley became CEO after 30 years within the business as an engineer. He laid out the foundation for what would become the AMETEK Growth Model with his four-pronged growth strategy: new product development, operational excellence, global and market expansion, and M&A. Blankley sought to achieve double digit earnings per share growth and superior returns on capital through application of the strategy.

Blankley was an independent thinker: by 1993 he decided the market was severely undervaluing AMETEK shares, so he cut the dividend by 65% to finance a massive share repurchase that resulted in a nearly 30% share count reduction by the end of 1996. He simultaneously pursued R&D investments and acquisitions that led to record sales of $869 million in 1996 and double digit earnings growth.

Ever the creative dealmaker, Blankley then executed a tax-free separation of AMETEK’s water filtration business in 1996 via a Reverse Morris Trust with Culligan Water Technologies for $155 million.

“Culligan came to us and said that we were extremely strong in channels that they didn't have strength in regard to taking the product to market. I agreed to listen if they gave us proper valuation for our water-filtration business today. And it had to be a tax free transaction, otherwise, all of the value that we created would be paid to the U.S. government, not the shareholders.”

—AMETEK CEO Walter Blankley, 1997

In 2000, engineer Frank Hermance became CEO after joining AMETEK ten years prior. Hermance focused on acquisitions to drive topline growth and operational excellence to expand margins, achieving 15% compounded annual earnings growth during his 16-year tenure.

In mid-2016, current CEO David Zapico took the reins after 27 years at AMETEK as an engineer and manager. Zapico executed the first major asset sale in over 25 years when he sold Reading Alloys in 2020, and he has since focused on acquiring high growth niche assets that can bolster future organic revenue growth.

AMETEK has generated a stunningly consistent 8-9% average annual revenue growth rate for decades across its colorful and varied history, inclusive of periodic spin-offs and asset disposals. Note the wide outperformance relative to nominal GDP growth.

AMETEK Today: A Niche Manufacturer

AMETEK today is a much more focused business than it was decades ago. It operates two segments: the Electronic Instruments Group (68% of revenue, 69% of EBIT) and the Electromechanical Group (32% of revenue, 31% of EBIT).

Each segment contains tens of Business Units (BUs). AMETEK operates 42 BUs, with a general manager having P&L responsibility for each BU. The 42 BUs roll up into 13 divisions, and the 13 divisions roll up into 4 group presidents, who in turn report to the CEO. This distributed operating structure of 18,500 employees is similar to other industry consolidators, most notably Constellation Software and Danaher.

EIG designs and manufactures advanced analytical, test and measurement instrumentation, and mission-critical communications products for the process, power and industrial, and aerospace markets.

EMG is a differentiated supplier of precision motion control solutions, thermal management systems, specialty metals, and electrical interconnects. Its end markets include aerospace and military, medical, automation, and other industrial markets.

AMETEK sells its products across a broad range of end markets:

AMETEK Playbook: Dominant Market Share in Niche Categories

While AMETEK does not disclose its market share positions in SEC filings or investor relations materials, management speaks candidly about its market position when talking to investors.

On average, AMETEK’s BUs are #1 or #2 in their respective categories, and these businesses tend to operate in markets that generate about $200 million in annual revenue. AMETEK’s BUs tend to hold 25-30% market share. Keep in mind these are average numbers management provides and can vary meaningfully by business.

Management avoids markets of $1 billion or more in size, as larger markets tend to attract competition. Each market in which AMETEK operates tends to have 1-3 dominant global players, and the remainder of the market is highly fragmented among small players lacking scale.

The result is very consistent pricing power. In 2021, CEO David Zapico noted that “we had about 3.5% of price. And inflation -- total inflation in our business was in the mid-2s,” implying pricing 100bps in excess of cost inflation. From 2017-2020, when cost inflation averaged 1.5-2.0% annually, pricing was 50bps higher than inflation each year according to management. While 50-100bps of pricing in excess of cost inflation may seem pedestrian, the positive impact to margins and returns on capital has been dramatic, which naturally leads us to discuss AMETEK’s financial history.

Conclusion to Part One

In next week’s issue, we will discuss AMETEK’s financial history, in addition to the AMETEK Growth Model, the company’s acquisition strategy, and the go-forward growth algorithm that ensure AMETEK remains a long-term compounder.