Investors prospecting for quality stocks will watch for companies with good returns on equity, or ROE. Everyone has a different threshold, but many would consider anything above 15% to be worth exploring.
But what if you find a stock with an ROE of 2,125.60%? That is what we have on the GuruFocus Summary page for Mettler-Toledo International Inc. (MTD, Financial), a global specialist in precision instruments and services. It develops, manufactures and sells a wide range of scales, instruments and other products that are used in laboratory, industrial and food service settings.
ROE is determined by dividing net income by the average total stockholders’ equity over a certain time period. According to GuruFocus, Mettler-Toledo had annualized net income of $1.06 billion in the fourth quarter of 2022.
In the same quarter, it had negative total stockholders’ equity of $29 million. Here’s how GuruFocus came to that conclusion:
While the ROE definition page does not explain how it arrived at 2,125.60%, a GuruFocus analyst explained the number on the Summary page is based off its trailing 12-month net income and the five-month average for total stockholders' equity.
Moving on from that, I wanted to know why Mettler-Toledo had negative equity for the fourth quarter and what it means for the company’s future.
Negative equity means a company’s total liabilities are greater than its total assets. That is normally something that would make investors nervous.
This is a 10-year chart showing total stockholders’ equity with a negative growth rate averaging 22.10% per year. It also shows how Mettler-Toledo’s long-term debt has increased by an average of 19.70% per year.
One result of the displacement of shareholder equity with debt has been an improving weighted average cost of capital to return on invested capital ratio.
It has also helped the company grow its revenue and net income over the past decade. Looking at the latter, that grew from $291 million in 2012 to $873 million in 2022.
At the same time, it has reduced the number of shares outstanding every year for the past 10 years, by an average of 3.27% per year.
When we combine a rising net income with a shrinking number of shares, earnings per share should grow relatively quickly. That is what we see in a 10-year chart of Mettler-Toledo’s earnings per share without non-recurring items.
That is earnings growth averaging 16.80% per year.
Turning to other fundamentals, institutional investors, who normally take a longer-term view, have cut their holdings to some extent. But this is an unusual case. At the end of August 2019, these pension, mutual and other funds held 77.64% of Mettler-Toledo’s shares; by February 2022, that number had reached 99.16%. Since then, their holdings have dropped to 86.11% as of the end of January 2023 and 80.54% at the end of February.
Based on 13F filings, there have been more sellers and fewer buyers among the gurus over the past three years.
Investors should be aware 13F filings do not give a complete picture of a firm’s holdings as the reports only include its positions in U.S. stocks and American depository receipts, but they can still provide valuable information. Further, the reports only reflect trades and holdings as of the most-recent portfolio filing date, which may or may not be held by the reporting firm today or even when this article was published.
Some of that may have been profit-taking, as Mettler-Toledo’s share price went into a swoon in early 2022, along with much of the market. Alternatively, it may reflect unease with the company’s growing debt burden.
Still, debt has hardly reached crisis proportions. It has an interest coverage ratio of 20.33 and its Altman Z-Score is robust at 10.52, indicating it is in good standing.
GuruFocus awards Mettler-Toledo with full 10 out of 10 rankings for profitability and growth. Its operating and net margins are industry leading at 28.73% and 22.26%. And as mentioned, the ROE is out of this world.
Its return on invested capital remains strong and industry leading at 35%. The company has been profitable in every one of the past 10 years.
In the growth area, revenue has grown by an average of 12.70% per year over the past three years, while Ebitda growth averaged 19% and earnings per share without NRI growth was 19.60%. A point of caution: while those are all satisfactory growth rates, they are only about average or lag the median of the medical diagnostics and research industry.
The growth of revenue and Ebitda has been quite consistent; it receives a 4.5 out of five-star ranking for predictability.
Free cash flow has also grown by an average of 17% per year over the past three years and 16.50% per over the past decade.
Mettler-Toledo does not pay a dividend, but it has been buying back its own shares, as noted.
Share prices are considered fair to overvalued, according to different metrics. The GF Value chart sees intrinsic value of $1,527.29, which is higher that the March 21 midday price of $1,480.43. Nevertheless, the chart considers Mettler-Toledo to be fairly valued currently based on historical ratios, past financial performance and analysts' future earnings projections.
The price-earnings ratio, at 38.49, is several notches higher than the industry median of 22.11. The five-year Ebitda growth rate averaging 16% per year is not high enough to pull the PEG ratio below the top of the fair range of 2. It is 2.41.
At the same time, the share price remains below its all-time high of $1,702.53, which it achieved on Dec. 30, 2021.
While the existence of negative equity may be concerning given its trailing 12-month ROE is so high, Mettler-Toledo has a powerful set of fundamentals that could appeal to some growth investors.
