ModernGraham Valuation: MTS Systems (MTSC)

moneyCompany 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 segment, based upon global similarities within their markets, products, operations and distribution. During the fiscal year ended September 29, 2012 (fiscal 2012), the Test and Sensors segments represent approximately 80% and 20% of Company revenue, respectively.

Defensive and Enterprising Investor Tests (What is the significance of these tests, and what is PEmg ratio?):

Defensive Investor – must pass at least 6 of the following 7 tests: Score = 3/7

  1. Adequate Size of Enterprise – market capitalization of at least $2 billion – FAIL
  2. Sufficiently Strong Financial Condition – current ratio greater than 2 – FAIL
  3. Earnings Stability – positive earnings per share for at least 10 straight years – PASS
  4. Dividend Record – has paid a dividend for at least 10 straight years – PASS
  5. Earnings Growth – earnings per share has increased by at least 1/3 over the last 10 years using 3 year averages at beginning and end of period – PASS
  6. Moderate PEmg ratio – PEmg is less than 20 – FAIL
  7. Moderate Price to Assets – PB ratio is less than 2.5 or PB x PEmg is less than 50 – FAIL

Enterprising Investor – must pass at least 4 of the following 5 tests or be suitable for a defensive investor: Score = 5/5

  1. Sufficiently Strong Financial Condition, Part 1 – current ratio greater than 1.5 – PASS
  2. Sufficiently Strong Financial Condition, Part 2 – Debt to Net Current Assets ratio less than 1.1 – PASS
  3. Earnings Stability – positive earnings per share for at least 5 years – PASS
  4. Dividend Record – currently pays a dividend – PASS
  5. Earnings growth – EPSmg greater than 5 years ago – PASS

Valuation Summary (Explanation of the ModernGraham Valuation Model)

Key Data:

MG Value $72.79
MG Opinion Fairly Valued
Value Based on 3% Growth $42.60
Value Based on 0% Growth $24.97
Market-implied growth rate 7.79%
NCAV $8.73
PEmg 24.08
Current Ratio 1.89
PB Ratio 4.25

Balance Sheet – 9/30/2013 

Current Assets $329,300,000
Current Liabilities $174,200,000
Total Debt $0
Total Assets $451,300,000
Intangible Assets $36,300,000
Total Liabilities $194,700,000
Outstanding Shares 15,410,000

Earnings Per Share

2013 $3.64
2012 $3.21
2011 $3.24
2010 $1.14
2009 $1.03
2008 $2.68
2007 $2.29
2006 $2.02
2005 $1.79
2004 $1.35
2003 $0.91
2002 $1.04

Earnings Per Share – Modern Graham 

2013 $2.94
2012 $2.48
2011 $2.10
2010 $1.63
2009 $1.90
2008 $2.24

Conclusion:

MTS Systems is an attractive company for the Enterprising Investor, having passed all of the requirements of the investor type.  However, that is not the case for Defensive Investors.  The company’s current ratio is slightly below the threshold of the Defensive Investor, the PEmg and PB ratios are too high, and the company is too small for the Defensive Investor.  As a result, only Enterprising Investors should feel comfortable proceeding with further research into the company, perhaps by beginning with a review of the ModernGraham Valuation of General Electric.  From a valuation standpoint, the company has grown its EPSmg (normalized earnings) from $2.24 in 2008 to $2.94 in 2013.  This level of earnings growth is in line with the market’s implied estimate of 7.79%, and the company therefore seems to be fairly valued at this time.

What do you think?  Do you agree that MTS Systems is fairly valued?  Is the company suitable only for Enterprising Investors?  Leave a comment on our Facebook page or mention @ModernGraham on Twitter to discuss.

If you like our valuations, why not check out ModernGraham Stocks & Screens?  It’s a great way to review the valuations while screening for things like low PE ratio, undervalued companies, etc.!

Disclaimer:  The author did not hold a position in MTS Systems (MTSC) at the time of publication and had no intention of entering into a position within the next 72 hours.

Photo Credit:  Andrew Magill


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