NEW YORK, July 24, 2019 /PRNewswire/ -- Report entitled
"Imprecise Earnings" outlines how Mettler-Toledo faces 30-50%
downside risk to approximately $410.00 to $575.00
per share after adjustments are made for aggressive financial, tax
and accounting policies and a contracting valuation premium
associated with poor earnings quality, among other factors.
- A History Of Control Concerns And Astonishingly Consistent
Earnings Results: Mettler-Toledo is thought to be a defensive,
reliable sales/earnings grower in analytical instrument end
markets. Many investors have forgotten that back in 2004 the Board
and Audit Committee, at the urging of a whistleblower, conducted an
investigation that would raise concerns about the company's
information systems and controls related to financial reporting.
Despite determining that it would be in the best interest of the
company to make changes in the leadership for the oversight of
financial operations, many of the individuals are still at Mettler
today.
Mettler's past allegations of improprieties provides an important
frame of reference when evaluating the company's uncanny ability to
beat analyst expectations. Since CEO Filliol took over in 2008,
Mettler has managed to go 44 consecutive quarters without ever
reporting an earnings disappointment. The success of this feat is
even more impressive given the company's industrial exposure, lack
of backlog, exposure to emerging markets, the unexpected
revaluation of EUR/CHF in 2015, disappointing acquisitions and
commodity exposure. Not surprisingly, and with the help of one of
the largest and outlandish buybacks (36x P/E) we've ever seen,
management also consistently achieves 100% or more of its annual
target cash bonus.
- Potential Earnings Magnification From Cost Capitalization,
Ongoing Restructurings and Inflation Of China Business: Based on
our forensic analysis and investigative findings we believe that
MTD is using a host of tactics to smooth and amplify its true
earnings. Its ERP implementation, program "Blue Ocean", has been
on-going since 2007. We estimate that software initiatives have
tallied $661m of costs that have been
capitalized and are being slowly amortized over 12yrs. We also
believe that the company's ongoing restructuring initiatives,
including tax restructurings, have likely served as a source of
earnings benefit. Notably, Mettler conducted a 2018 tax
restructuring in Luxembourg,
accounting for 127% of its consolidated book value. Additionally,
our diligence into Mettler's China
business shows evidence to suggest significant profit
overstatement, cash running through shell entities, and an empty
office. We've called for an independent committee to evaluate these
and other findings as we are concerned that its closeness to PwC
may hinder an objective review.
- Undeserved Record Valuation Multiple And Premium: MTD trades
14% above the current average analyst price targets of $705/sh and at all-time high valuation multiples,
yet is not expected to grow any faster than its peers. We believe a
rotation into perceived safety stocks has driven incredible
short-term inflation in the share price. Our view of Mettler's
current stock over-valuation is supported by recent sell side price
target reductions and Mettler's chairman recently signaling his
intention to sell 33% of his total holdings. By normalizing street
estimates for aggressive accounting choices, never-ending
restructuring charges, and lower sales and profits in China, we estimate MTD's normalized Adj EPS at
$18.09 - $20.31, materially lower than consensus of
$22.70. Mettler's valuation premium
should contract as investors re-think the quality of earnings and
management. By valuing shares at our normalized earnings and a
slight discount to industry multiples, it's easy to justify 30%-50%
downside risk ($410-$575/sh).
About Spruce Point Capital
Spruce Point Capital Management, LLC, is a forensic
fundamentally-oriented investment manager that focuses on
short-selling, value and special situation investment
opportunities.
Contact
Sean
Donohue
Spruce Point Capital Management
sean.donohue@sprucepointcap.com
212-519-9813
Spruce Point Capital Management, LLC is a member of the
Financial Industry Regulatory Authority, CRD number 288248.
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SOURCE Spruce Point Capital Management