Mettler-Toledo Stock Can See Lower Levels

Mettler-Toledo stock (NYSE: MTD) is up 27% since the start of the year and has gained around 70% from its March lows. Mettler-Toledo, a global manufacturer of scales and analytical instruments, faces downside risk as the company’s revenues in the last two quarters have declined by 5%. The ongoing Covid-19 crisis and the economic uncertainty is likely to result in lower demand for its products, especially in industrial and food retailing applications. This is likely to impact the revenue growth rate of the company as sales-cycles are expected to take more time than usual, and this is likely to hit its profitability – leading to a drop in the stock price.

Following a large 70% rise since the March 23 lows of this year, at the current price of $1,004 per share, we believe MTD stock has reached its near term potential. MTD stock has rallied from $590 to $1,004 off the recent bottom compared to the S&P which moved 48% over the same time period. Higher demand for laboratory instruments has helped the stock in beating overall markets. Moreover, the stock is up 60% from levels seen in early 2018, over two years ago. MTD stock fully recovered to the level it was before the drop in February due to the coronavirus outbreak becoming a pandemic in the month of May itself, and it is now 30% above the pre-Covid highs. This seems to make it fully valued as, in reality, demand and revenues will likely be lower this year than last year. Our dashboard ‘Buy Or Sell Mettler Stock’ provides the key numbers behind our thinking, and we explain more below.

Some of the stock price rise over the last 2 years is justified by the roughly 11% growth seen in Mettler’s revenues from $2.7 billion in 2017 to $3.0 billion in 2019. This combined with a 6.8% growth in Mettler’s net income margin, helped its earnings grow by over 9.5% over the same time period, providing a boost to the company’s stock price. Overall, earnings on a per-share basis grew by 12.3% as shares outstanding decreased by 4% due to repurchases.

Finally, Mettler’s P/E ratio fell from around 42x in 2017 to nearly 35x in 2019. While the company’s P/E has now increased to 44x, it seems to be trading toward the higher end of the spectrum. We believe there is a possible downside risk for Mettler’s multiple when compared to levels seen over the recent years, and the stock is unlikely to see much upside after the recent rally and the potential weakness from a recession-driven by the Covid outbreak.

How Is Coronavirus Impacting MTD Stock?

The global spread of coronavirus has affected industrial and economic activity across the world, which is likely to adversely impact the company’s revenues as demand for industrial instruments has taken a hit. Challenging market conditions resulted in a 13% decline in Retail segment sales for the company, while Laboratory and Industrial segments saw a 5% decline each during Q2. Overall, we expect demand to be lower in 2020 due to uncertainty resulting from the outbreak of coronavirus which leads us to believe that the stock is currently overvalued. In fact, revenues are estimated to decline 2% to a little under $3.0 billion, while earnings are estimated to be $23.14 on a per share and adjusted basis for the full year 2020, slightly higher than the $22.77 figure reported in 2019. While the impact on revenues and earnings is minimal when compared to the previous year, the recent rally in the stock has meant an expensive valuation multiple for MTD stock, making it vulnerable to downside risk.

Looking at the broader economy, the actual recovery and its timing hinge on the containment of the coronavirus spread. Our dashboard Trends In U.S. Covid-19 Cases provides an overview of how the pandemic has been spreading in the U.S. and contrasts with trends in Brazil and Russia. Following the Fed stimulus — which set a floor on fear — the market has been willing to “look through” the current weak period and take a longer-term view. With investors focusing their attention on 2021 results, the valuations become important in finding value. Though market sentiment can be fickle, and evidence of an uptick in new cases could spook investors once again.

What if you’re looking for a more balanced portfolio instead? Here’s a high-quality portfolio to beat the market, with over 100% return since 2016, versus 55% for the S&P 500. Comprised of companies with strong revenue growth, healthy profits, lots of cash, and low risk, it has outperformed the broader market year after year, consistently.

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