IT Hardware Stocks

MTS Systems Corp Valuation – June 2018 $MTSC

Company Profile (excerpt from Reuters): MTS Systems Corporation, incorporated on September 12, 1966, is a supplier of test systems and position sensors. The Company operates through two segments: Test and Sensors. The Test segment provides testing equipment, systems and services. The Test segment serves various markets, including the ground vehicles, materials and structures. The Sensors segment provides position sensors for a range of industrial and mobile hydraulic applications. The Company’s Sensors Segment serves markets, including industrial machinery, mobile hydraulics and liquid level. The Company has its manufacturing facilities in North America, Europe and Asia.

 

Downloadable PDF version of this valuation:

ModernGraham Valuation of MTSC – June 2018

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 $929,695,622 Fail
2. Sufficiently Strong Financial Condition Current Ratio > 2 1.68 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 21.81% Fail
6. Moderate PEmg Ratio PEmg < 20 21.36 Fail
7. Moderate Price to Assets PB Ratio < 2.5 OR PB*PEmg < 50 2.15 Pass
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 1.68 Pass
2. Sufficiently Strong Financial Condition Debt to NCA < 1.1 2.02 Fail
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 Fail

 

Stage 2: Determination of Intrinsic Value

EPSmg $2.46
MG Growth Estimate -2.80%
MG Value $7.14
Opinion Overvalued
MG Grade D+
MG Value based on 3% Growth $35.74
MG Value based on 0% Growth $20.95
Market Implied Growth Rate 6.43%
Current Price $52.65
% of Intrinsic Value 737.31%

MTS Systems Corporation does not satisfy the requirements of either the Enterprising Investor or the more conservative Defensive Investor. The Defensive Investor is concerned with the small size, low current ratio, insufficient earnings growth over the last ten years, and the high PEmg ratio. The Enterprising Investor has concerns regarding the level of debt relative to the net current assets, and the lack of earnings growth over the last five years. As a result, all value investors following the ModernGraham approach should explore other opportunities at this time or proceed cautiously with a speculative attitude.

As for a valuation, the company appears to be Overvalued after seeing its EPSmg (normalized earnings) decline from $3.03 in 2014 to an estimated $2.46 for 2018. This level of demonstrated earnings growth does not support the market’s implied estimate of 6.43% annual earnings growth over the next 7-10 years. As a result, the ModernGraham valuation model, based on the Benjamin Graham value investing formula, returns an estimate of intrinsic value below the price.

At the time of valuation, further research into MTS Systems Corporation revealed the company was trading above its Graham Number of $44.1. The company pays a dividend of $1.2 per share, for a yield of 2.3%, putting it among the best dividend paying stocks today. Its PEmg (price over earnings per share – ModernGraham) was 21.36, which was below the industry average of 55.37, which by some methods of valuation makes it one of the most undervalued stocks in its industry. Finally, the company was trading above its Net Current Asset Value (NCAV) of $-13.04.

MTS Systems Corporation scores quite poorly in the ModernGraham grading system, with an overall grade of D+.

Stage 3: Information for Further Research

Net Current Asset Value (NCAV) -$13.04
Graham Number $44.10
PEmg 21.36
Current Ratio 1.68
PB Ratio 2.15
Current Dividend $1.20
Dividend Yield 2.28%
Number of Consecutive Years of Dividend Growth 0

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Most Recent Balance Sheet Figures

Balance Sheet Information 3/1/2018
Total Current Assets $432,414,000
Total Current Liabilities $257,065,000
Long-Term Debt $354,255,000
Total Assets $1,155,921,000
Intangible Assets $620,983,000
Total Liabilities $683,691,000
Shares Outstanding (Diluted Average) 19,273,000

Earnings Per Share History

EPS History
Next Fiscal Year Estimate $3.58
Sep2017 $1.31
Sep2016 $1.70
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

Earnings Per Share – ModernGraham History

EPSmg History
Next Fiscal Year Estimate $2.46
Sep2017 $2.10
Sep2016 $2.61
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

Recommended Reading:

Other ModernGraham posts about the company

MTS Systems Corp Valuation – July 2016 $MTSC
MTS Systems Corp Valuation – February 2016 Update $MTSC
13 Best Stocks For Value Investors This Week – 10/17/15
MTS Systems Corporation Valuation – October 2015 Update $MTSC
The Best Stocks of the IT Hardware Industry – September 2015

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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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