Spruce Point Capital Management Releases A Strong Sell Research Opinion On Mettler-Toledo International Inc. (NYSE: MTD)
NEW YORK, July 24, 2019 /PRNewswire/ -- Report entitled "Imprecise Earnings" outlines how Mettler-Toledo faces 30-50% downside risk to approximately $410.00 to $575.00 per share after adjustments are made for aggressive financial, tax and accounting policies and a contracting valuation premium associated with poor earnings quality, among other factors.
- A History Of Control Concerns And Astonishingly Consistent Earnings Results: Mettler-Toledo is thought to be a defensive, reliable sales/earnings grower in analytical instrument end markets. Many investors have forgotten that back in 2004 the Board and Audit Committee, at the urging of a whistleblower, conducted an investigation that would raise concerns about the company's information systems and controls related to financial reporting. Despite determining that it would be in the best interest of the company to make changes in the leadership for the oversight of financial operations, many of the individuals are still at Mettler today.
Mettler's past allegations of improprieties provides an important frame of reference when evaluating the company's uncanny ability to beat analyst expectations. Since CEO Filliol took over in 2008, Mettler has managed to go 44 consecutive quarters without ever reporting an earnings disappointment. The success of this feat is even more impressive given the company's industrial exposure, lack of backlog, exposure to emerging markets, the unexpected revaluation of EUR/CHF in 2015, disappointing acquisitions and commodity exposure. Not surprisingly, and with the help of one of the largest and outlandish buybacks (36x P/E) we've ever seen, management also consistently achieves 100% or more of its annual target cash bonus.
- Potential Earnings Magnification From Cost Capitalization, Ongoing Restructurings and Inflation Of China Business: Based on our forensic analysis and investigative findings we believe that MTD is using a host of tactics to smooth and amplify its true earnings. Its ERP implementation, program "Blue Ocean", has been on-going since 2007. We estimate that software initiatives have tallied $661m of costs that have been capitalized and are being slowly amortized over 12yrs. We also believe that the company's ongoing restructuring initiatives, including tax restructurings, have likely served as a source of earnings benefit. Notably, Mettler conducted a 2018 tax restructuring in Luxembourg, accounting for 127% of its consolidated book value. Additionally, our diligence into Mettler's China business shows evidence to suggest significant profit overstatement, cash running through shell entities, and an empty office. We've called for an independent committee to evaluate these and other findings as we are concerned that its closeness to PwC may hinder an objective review.
- Undeserved Record Valuation Multiple And Premium: MTD trades 14% above the current average analyst price targets of $705/sh and at all-time high valuation multiples, yet is not expected to grow any faster than its peers. We believe a rotation into perceived safety stocks has driven incredible short-term inflation in the share price. Our view of Mettler's current stock over-valuation is supported by recent sell side price target reductions and Mettler's chairman recently signaling his intention to sell 33% of his total holdings. By normalizing street estimates for aggressive accounting choices, never-ending restructuring charges, and lower sales and profits in China, we estimate MTD's normalized Adj EPS at $18.09 - $20.31, materially lower than consensus of $22.70. Mettler's valuation premium should contract as investors re-think the quality of earnings and management. By valuing shares at our normalized earnings and a slight discount to industry multiples, it's easy to justify 30%-50% downside risk ($410-$575/sh).
\The research note can be found at www.sprucepointcap.com and updates will be posted on twitter @sprucepointcap.
About Spruce Point Capital
Spruce Point Capital Management, LLC, is a forensic fundamentally-oriented investment manager that focuses on short-selling, value and special situation investment opportunities.
