TFX - Teleflex: Flexing Its Muscles A Bit

2023-07-27 15:05:43 ET

Summary

• Teleflex Incorporated saw a tougher 2022, but has found some operating momentum again.
• The company is using this momentum to announce its next bolt-on deal, being strategic but a bit expensive.
• Following a 20% re-rating over the past year, I think that Teleflex Incorporated valuations look a lot more fair, making me more inclined to sell on rips here.

In the summer of last year, I believed that it was time for Teleflex Incorporated ( TFX ) to flex its muscles. This came after a long-term value creator had been struggling for some time, with operating momentum at the time being softer due to a stronger dollar and new regulations being imposed on major parts of the business.

This meant that a premium multiple has compressed to a market multiple, making me upbeat on the long-term outlook. Amidst more stable results so far this year, shares have seen a modest recovery, resulting in a partial re-rating of the stock here.

Medical Device & Instruments

Teleflex generated about $2.5 billion in sales from a range of medical devices and instruments in the year, with 20,000 products being used in over ten thousand surgical procedures per day, assisting emergency responders and IC patients.

The company has seen solid growth in the decade leading up to 2020, with sales having risen from $1.0 billion towards $2.5 billion, as operating margins grew by five points to 25% of sales. This drove a massive run in the shares, which rose from $50 in 2010 to $400 early in 2020. Shares have seen a substantial pullback ever since.

Pre-pandemic, the company was a business which posted GAAP earnings of $10 per share and adjusted earnings which came in a dollar higher, that is in 2019. The company guided for strong earnings growth to $12.60 per share in 2020 (adjusted, that is), although this guidance could be thrown out the window amidst the pandemic.

With shares trading at $400 in May 2021, the resulting 31 times earnings multiple was expensive, certainly as the company has taken on about $2 billion in net debt while smaller asset sales and non-demanding multiples made it hard to get upbeat.

When I picked up coverage in the summer of 2022, the situation looked a lot friendlier from the perspective of a potential investor. Shares fell to the $220 mark, all while 2021 revenues advanced to $2.8 billion and earnings were reported at $13.33 per share.

The company furthermore outlined a solid outlook, with organic growth for 2022 seen up by mid-single digits, with earnings seen at $14 per share (adjusted that is). That said, GAAP earnings were only seen at $9 per share, due to charges related to the Medical Device regulation in Europe.

After a softer quarter, the company cut the adjusted guidance to $13.20 per share, with shares trading at 17 times adjusted earnings in August. It was appealing enough for me to buy the dip.

And Now?

My optimism around $220 per share meant that I initiated a position around that level, as I added some more towards the $200 mark, as the company actually saw shares decline to lows in the $180s during the fall. Ever since, shares have risen and have traded in a $220-$260 range for most of 2023, now trading at the higher end of the range at $256 per share.

In February, Teleflex posted 2022 results which were not too great. Reported sales fell by 0.7% to $2.79 billion, although that they were up by 2.9% in constant currency terms. Adjusted earnings fell from $13.33 per share to $13.06 per share, as GAAP earnings fell to $7.67 per share, with net debt reported at $1.4 billion. For 2023, the company outlined a not too impressive guidance with sales seen up 5% and adjusted earnings seen between $13.00 and $13.60 per share, as the gap with GAAP earnings still was substantial, due to amortization charges to a large extent.

After posting a 13.2% increase in constant currency revenue growth for the first quarter, aided to an important extent by five extra shipping days, the company hiked the full year sales guidance to just over 5%. The company kept the earnings per share guidance unchanged, as net debt came in at $1.37 billion, for a leverage ratio around 2 times.

With a stable share count of 47 million shares trading at $256, the market value has recovered to $12.0 billion, for a $13.4 billion enterprise valuation, translating into a fair 4.5 times sales multiple and 19-20 times adjusted earnings multiple.

A Bolt-On Deal

In July, Teleflex announced its next deal. It had reached a deal with privately held Palette Life Sciences AB to acquire it in for $600 million, with milestone payments having the potential to boost the price by another fifty million dollars.

The deal is set to add to the Interventional Urology portfolio, with Palette set to generate $56 million in revenues this year, suggesting a more than 10 times sales multiple is paid. The deal tag is equal to about 5% of the valuation of Teleflex, while it adds just 2% of sales, indicating that indeed this is a more expensive deal.

While the deal will add to near term operating earnings, this still feels a rich deal, even if the company expects high-teens/low-20s revenue growth in 2024. That said, the company has high hopes for Barrigal used in prostate cancer radiation, potentially being a wildcard for these projected revenue numbers.

Despite margins accretion, it is the financial costs associated with the deal which will shave off an estimated $0.25 per share from adjusted earnings, making it hard to get really upbeat in the meantime, all while net debt will tick put towards the $2 billion mark again.

A Balancing Trick

Siting on decent 20% gains from my average levels initiated in the fall last year, I find myself performing a balancing trick. The 2022 results were soft, as expected, yet the 2023 outlook is not too convincing as well.

While I understand the latest deal from a growth perspective, it does not turn out to be a game changer, and some near-term earnings pressure is seen.

This means that Teleflex Incorporated valuation has re-rated quite a bit already, making me too cautious here to get upbeat. The re-rating looks largely fair, and while there might be more in the works, I am mentally preparing to trim some of my position if shares see some upwards momentum here.

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