2023-04-24 14:07:11 ET
Summary
- Shares of Teledyne Technologies Incorporated have seen solid growth following the FLIR deal.
- I like the long-term performance and positioning of both the company and its shares.
- Teledyne Technologies' valuations here look largely fair, especially given the current interest rate environment.
Nearly a year ago, I was imagining better days for shares of Teledyne Technologies Incorporated ( TDY ). This came as the business had seen a strong 2021, having digested the large FLIR deal very well.
Amidst a pullback seen in the shares at the time, appeal appeared to be rapidly improving, as I liked the set-up.
A Recap
In May of last year, shares of Teledyne fell about a hundred dollars to $390. This marked quite a violent pullback in a short period of time, although year-to-date losses only came in at 10%, marking an outperformance versus some other high fliers.
Teledyne is a technological conglomerate which focuses on activities which relate to sensing, gathering, transmission and analysis of information, both in the digital and physical domain. The company is quite diversified in terms of technologies, sectors and geographical regions. The very strong organic growth positioning and dealmaking capabilities made that the company has seen solid growth, as this was just a $600 million business in the year 2000.
The company saw a huge boost on the back of an $8 billion deal to acquire FLIR early in 2021, at a time when Teledyne itself was valued at just around $15 billion. The deal was set to add $1.9 billion of digital imaging sales from FLIR to the $3.1 billion revenue base of Teledyne, creating a $5.0 billion revenue base.
A $400 stock at the time of the deal announcement, in combination with $13 in earnings per share power post synergies resulting from the deal, made me cautious at 31 times earnings, but ever since some real profit gains have been made.
Integrating Well
Following the FLIR deal, shares of Teledyne have largely traded around the $400 mark, with a peak at nearly $500 in April 2022,, but they sold off to $390 in May. The FLIR deal closed in May 2021 as the company had initiated a full year guidance of $12.00-$12.20 per share, but that was ahead of FLIR. Including that deal, earnings were seen at $15.00-$15.25 per share, stronger than I hoped for.
Amidst strong operating momentum, the company posted far stronger than expected earnings at $16.86 per share in 2021, as the company guided for earnings between $17.60 and $18.00 per share in 2022. Moreover, the reconciliation to GAAP earnings looked fair, as leverage rapidly came down to about 3 times already.
The combination of stronger than expected operational performance and a lagging share price meant that earnings multiples and hence expectations had fallen rapidly. A 36 times earning stock at the time of the deal announcement had seen its valuation come down to 22 times this time last year, as leverage came down a lot. Teledyne Technologies Incorporated started to reveal some appeal in my eyes at $390 in May last year.
What Happened?
Since voicing a more upbeat tone on Teledyne Technologies Incorporated shares about a year ago, we have actually seen shares fall to a low of $340 in the autumn, as shares have risen to a high at $450 in recent weeks, now trading at $428 per share.
In April of last year, the company posted first quarter results for its fiscal year 2022, with sales up 64% to $1.32 billion as the company posted GAAP earning of $4.46 per share, although the adjusted earnings came in a little lower at $4.27 per share. Net debt came in at $3.8 billion, for a 2.8 times leverage ratio, yet the company lowered the midpoint of the adjusted earnings guidance from $17.87 per share to $17.80 per share.
With leverage under control, Teledyne Technologies Incorporated announced some bolt-on deals during the year, including ETM and the purchase of ChartWorld international at the start of 2023, but they did not quantify the acquisition price nor revenue contributions. By January of his year, the company posted its full year results, with revenues coming in at nearly $5.5 billion while GAAP earnings were posted at $16.53 per share. Adjusted earnings came in at $18.13 per share, ahead of the initial guidance for the year. The company ended the year with a 2.4 times leverage ratio, based on net debt being down to $3.3 billion.
For 2023, the company guided for adjusted earnings between $19.00 and $19.20 per share, which looks decent, but most of the growth has been seen already. Growth was stable in recent times, including a 3% increase in reported fourth quarter results, offset by a nearly similar declines as a result of the impact of a strong dollar. With shares trading at $427 per share, Teledyne Technologies trades at 22 times earnings. This is similar to April of last year, as leverage has come down a bit, but few immediate triggers were seen.
And Now?
The reality is that, in this higher interest rate environment, I am not happy to acquire Teledyne Technologies Incorporated shares at a similar multiple today as I did in April. In the meantime, shares have risen from $390 to $427 per share, trading up roughly 10%. This is the result of similar valuation multiples, as earnings growth went hand in hand with the share price performance.
While leverage has come done a lot and FLIR apparently integrated well, I am waiting for a lower entry point in Teledyne Technologies Incorporated given that interest rates moved up so much in the meantime.
Hence, I am actually happy to sell Teledyne Technologies Incorporated shares on rips higher, as a re-test of the $450 mark (or a bit higher) makes me inclined to sell out of a modest long position, while I would like to add more at levels in the mid $300s.
For further details see:
Teledyne Technologies: Quality Prevails