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Why Is Mettler-Toledo (MTD) Down 8.1% Since Last Earnings Report?

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It has been about a month since the last earnings report for Mettler-Toledo (MTD - Free Report) . Shares have lost about 8.1% in that time frame, underperforming the S&P 500.

Will the recent negative trend continue leading up to its next earnings release, or is Mettler-Toledo due for a breakout? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at the most recent earnings report in order to get a better handle on the important catalysts.

Recent Earnings

Mettler-Toledo International reported second-quarter 2018 adjusted earnings of $4.65 per share, which beat the Zacks Consensus Estimate of $4.58 and increased 18.6% on a year-over-year basis.

Net sales of $722 million beat the Zacks Consensus Estimate of $714.9 million and were up 10.5% year over year.

In local currency, sales grew 7%. Further, favorable exchange rate contributed 3% to year-over-year growth.

The top-line growth was driven by robust performance of Laboratory business across all geographies and benefits from Biotix acquisition. Also, strong performance in China propelled growth.

Top Line in Detail    

Laboratory Segment (50% of net sales) witnessed 10% sales growth on a year-over-year basis driven by strong product portfolio, Field Turbo investments, marketing initiatives and improving Spinnaker sales. Moreover, acquisition of Biotix benefited the segment. Moreover, the company’s process analytics business showed remarkable growth this quarter. It derived 40% of its revenues from consumables and service and generated 10% of total sales.

Industrial Segment (42%) revenues grew 3% year over year. The company’s core industrial business grew 7%. However, it was offset by a 3% fall in product inspection. Robust growth of product inspection in the year-ago quarter led to a tough year-over-year comparison.

Revenues from Food Retail Segment (8%) grew 6% on a year-over-year basis and surpassed management’s expectation on the back of strong project growth in United States. The segment witnessed modest growth in Asia/Rest of the World, while growth in Europe faltered.

Geographically, Mettler-Toledo generated 38% of sales from Americas, up 4% year over year. This was driven by robust performance of core industrial, Laboratory and food retail business.

Sales from Europe, contributing 31% to net sales, increased 7% from the prior-year quarter on the back of solid core industrial business.

The company generated 31% of sales from Asia/Rest of the World, up 9% on a year-over-year basis. This was primarily driven by strong performance of the company in China where laboratory and industrial businesses grew 20% and 10%, respectively.

Operating Results

Gross margin was 57.2%, which contracted 30 basis points (bps) year over year. The contraction was due to unfavorable mix, consolidation cost related to product inspection and negative impact of foreign exchange. However, effective pricing was a positive.

Research & development (R&D) expenses were $35.3 million, up 6% from the year-ago quarter in local currency. Selling, general & administrative (SG&A) expenses increased 3% in local currency to $208 million. Increase in investments in field resources outweighed the cost-saving initiatives of the company.

Adjusted operating margin was 23.4%, up 80 bps year over year. There was no impact from currencies this quarter.

Balance Sheet and Cash Flow

As of Jun 30, 2018, the company’s cash and cash equivalents balance was $183.2 million compared with $98.9 million in the previous quarter.

Long-term debt was $1.02 billion, which increased from $978.7 million in the previous quarter.

Mettler-Toledo generated $140.2 million of cash from operating activities, up from $76.6 million in the prior quarter. Free cash flow was $120.8 million compared with $56.5 million in the first quarter.

Guidance

For third-quarter 2018, Mettler-Toledo expects sales growth of 6% in local currency. Adjusted earnings are expected in the range of $4.97-$5.02 per share, up 14-15% year over year.

The company expects gross margin to remain flat in the third quarter owing to the tariff headwind that it is likely to face. Mettler-Toledo plans to counter the tariff issue by raising prices, which it does not view as a challenge as competitors have also resorted to the same thing.

For 2018, the company continues to expect sales to grow 6% at local currency. Adjusted earnings are still expected to be in the range of $20.01-$20.25 per share

Further, Mettler-Toledo expects share repurchase worth $475 million in 2018.

How Have Estimates Been Moving Since Then?

In the past month, investors have witnessed a downward trend in fresh estimates.

VGM Scores

At this time, Mettler-Toledo has a great Growth Score of A, though it is lagging a bit on the Momentum Score front with a B. However, the stock was allocated a grade of D on the value side, putting it in the bottom 40% for this investment strategy.

Overall, the stock has an aggregate VGM Score of B. If you aren't focused on one strategy, this score is the one you should be interested in.

Our style scores indicate that the stock is more suitable for growth investors than momentum investors.

Outlook

Estimates have been broadly trending downward for the stock, and the magnitude of these revisions indicates a downward shift. Notably, Mettler-Toledo has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.


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