IT Hardware Stocks

MTS Systems Corp Valuation – February 2016 Update $MTSC

Benjamin Graham taught that Intelligent Investors must do a thorough fundamental analysis of investment opportunities to determine their intrinsic value and inherent risk.  This is best done by utilizing a systematic approach to analysis that will provide investors with a sense of how a specific company compares to another company or by reviewing the 10 Most Undervalued Companies for the Defensive Investor – November 2015.  By using the ModernGraham method one can review a company’s historical accomplishments and determine an intrinsic value that can be compared across industries.  What follows is a stock analysis showing a specific look at how MTS Systems Corp (MTSC) fares in the ModernGraham valuation model.

Company Profile (obtained from Google Finance): MTS Systems Corporation (MTS) is a global supplier of test systems and position sensors. The Company’s operations are organized and managed in two business segments: the Test segment and the Sensors. Testing segment’s testing hardware, software and services solutions help customers improve their design, development, and manufacturing processes and are used for determining the mechanical behavior of materials, products, and structures. Test also sells a range of accessories and spare parts, as well as services, including installation, calibration, maintenance, training and consulting. MTS’ sensors segment provides controls for a range of industrial and vehicular applications. The segment’s customer industries include manufacturers of plastic injection molding machines, steel mills, fluid power, oil and gas, medical, wood product processing equipment, mobile equipment, and energy.

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Downloadable PDF version of this valuation:

ModernGraham Valuation of MTSC – February 2016

Stage 1: Is this company suitable for the Defensive Investor or the Enterprising Investor?

What kind of Intelligent Investor are you?

Defensive Investor; must pass 6 out of the following 7 tests.
1. Adequate Size of the Enterprise Market Cap > $2Bil $798,953,728 Fail
2. Sufficiently Strong Financial Condition Current Ratio > 2 1.86 Fail
3. Earnings Stability Positive EPS for 10 years prior Pass
4. Dividend Record Dividend Payments for 10 years prior Pass
5. Earnings Growth Increase of 33% in EPS in past 10 years using 3 year averages at beginning and end 43.14% Pass
6. Moderate PEmg Ratio PEmg < 20 17.14 Pass
7. Moderate Price to Assets PB Ratio < 2.5 OR PB*PEmg < 50 3.06 Fail
Score
Enterprising Investor; must pass 4 out of the following 5 tests, or be suitable for the Defensive Investor.
1. Sufficiently Strong Financial Condition Current Ratio > 1.5 1.86 Pass
2. Sufficiently Strong Financial Condition Debt to NCA < 1.1 0.00 Pass
3. Earnings Stability Positive EPS for 5 years prior Pass
4. Dividend Record Currently Pays Dividend Pass
5. Earnings Growth EPSmg greater than 5 years ago Pass

Stage 2: Determination of Intrinsic Value

MTSC value Chart February 2016

EPSmg $3.06
MG Growth Estimate 3.44%
MG Value $46.96
Opinion Overvalued
MG Value based on 3% Growth $44.30
MG Value based on 0% Growth $25.97
Market Implied Growth Rate 4.32%
Current Price $52.38
% of Intrinsic Value 111.54%

MTS Systems Corp qualifies for the Enterprising Investor but not the more conservative Defensive Investor.  The Defensive Investor is concerned with the small size, low current ratio, and the high PB ratio.  The Enterprising Investor has no initial concerns.  As a result, all Enterprising Investors following the ModernGraham approach based on Benjamin Graham’s methods should feel comfortable proceeding with further research into the company.

As for a valuation, the company appears to be overvalued after growing its EPSmg (normalized earnings) from $2.49 in 2012 to an estimated $3.06 for 2016.  This level of demonstrated earnings growth does not support the market’s implied estimate of 4.32% annual earnings growth over the next 7-10 years.  As a result, the ModernGraham valuation model, based on Benjamin Graham’s formula, returns an estimate of intrinsic value below the price.

The next part of the analysis is up to individual investors, and requires discussion of the company’s prospects.  What do you think?  What value would you put on MTS Systems Corp (MTSC)?  Where do you see the company going in the future?  Is there a company you like better?  Leave a comment on our Facebook page or mention @ModernGraham on Twitter to discuss.

Stage 3: Information for Further Research

MTSC Charts February 2016

Net Current Asset Value (NCAV) $8.29
Graham Number $34.33
PEmg 17.14
Current Ratio 1.86
PB Ratio 3.06
Dividend Yield 2.29%
Number of Consecutive Years of Dividend Growth 0

 

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Most Recent Balance Sheet Figures

Balance Sheet Information Sep2015
Total Current Assets $327,713,000
Total Current Liabilities $176,652,000
Long-Term Debt $0
Total Assets $460,831,000
Intangible Assets $47,383,000
Total Liabilities $202,689,000
Shares Outstanding (Diluted Average) 15,073,000

Earnings Per Share History

Next Fiscal Year Estimate $3.03
Sep2015 $3.00
Sep2014 $2.73
Sep2013 $3.64
Sep2012 $3.21
Sep2011 $3.24
Sep2010 $1.14
Sep2009 $1.03
Sep2008 $2.80
Sep2007 $2.29
Sep2006 $2.04
Sep2005 $1.81
Sep2004 $1.35
Sep2003 $0.95
Sep2002 $0.20
Sep2001 $0.50
Sep2000 $0.17
Sep1999 $0.59
Sep1998 $1.01
Sep1997 $1.05
Sep1996 $0.74

Earnings Per Share – ModernGraham History

Next Fiscal Year Estimate $3.06
Sep2015 $3.10
Sep2014 $3.03
Sep2013 $2.94
Sep2012 $2.49
Sep2011 $2.12
Sep2010 $1.66
Sep2009 $1.94
Sep2008 $2.28
Sep2007 $1.91
Sep2006 $1.57
Sep2005 $1.21
Sep2004 $0.82
Sep2003 $0.53
Sep2002 $0.38
Sep2001 $0.53
Sep2000 $0.61

Recommended Reading:

Other ModernGraham posts about the company

13 Best Stocks For Value Investors This Week – 10/17/15
The Best Stocks of the IT Hardware Industry – September 2015
The 20 Best Stocks For Value Investors This Week – 7/25/15
MTS Systems Corporation Analysis – July 2015 Update $MTSC
MTS Systems Corporation Quarterly Valuation – April 2015 $MTSC

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Disclaimer:

The author did not hold a position in any company mentioned in this article at the time of publication and had no intention of changing that position within the next 72 hours.  See my current holdings here.  This article is not investment advice; any reader should speak to a registered investment adviser prior to making any investment decisions.  ModernGraham is not affiliated with the company in any manner.  Please be sure to review our detailed disclaimer.

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