2023-07-21 09:42:58 ET
Summary
- Teledyne Technologies' acquisition of FLIR Systems in 2021 has led to significant revenue growth, nearly doubling from $3 billion in 2021 to $5.5 billion in 2022.
- The company's business segments include Digital Imaging, Instrumentation, Aerospace and Defense Electronics, and Engineered Systems, with Digital Imaging being the largest revenue stream.
- Despite an $8 billion deal in 2021 that significantly increased TDY's debt position, the company's financial position remains strong, with an FCF of over $200 million in Q1 of 2023.
Investment Rundown
Back in early 2021 Teledyne Technologies Incorporated ( TDY ) agreed to acquire FLIR Systems. The whole transaction was valued at $8 billion. Since then, the revenue growth has been immense, almost doubling from $3 billion in 2021 to $5.5 billion in 2022. The share price has followed, but that doesn't mean that it's in overvalued territory yet, in my view. Rather, the company looks very appealing now. It wasn't caught up in the whole AI hype that happened in 2023 that sent shares of companies like NVIDIA Corporation ( NVDA ) up drastically.
For investors seeking some good exposure to the electronic equipment industry in a company that is consistently posting record EPS results, then TDY looks very good now. Profit margins are solid, and with near 15% FCF margins, the risk of significant dilution from here is slim. Rating TDY a buy.
Company Segments
For TDY you could divide the business into 4 primary segments, those being: Digital Imaging, Instrumentation, Aerospace and Defense Electronics, and lastly Engineered Systems. Digital Imaging remains the largest revenue stream for TDY, generating $772 million in the first quarter of 2023, a 2.9% YoY increase.
Digital Imaging (Emergen Research)
The market for digital imaging is also expected to grow steadily over the coming years. The global market is predicted to see a 2.3% CAGR from 2018 to 2028. But markets like North America or Asia Pacific are instead expected to see higher growth.
The FLIR acquisition that TDY entered into back in January 2021 set them on a very good path to growing revenues. FLIR is focused on making sensing technologies, which netted them very strong growth. But what bolsters the potential of the company is the fact that they generate a significant amount from government deals. In 2022, for example, they received nearly 30% of revenues from government deals. With a close relationship like this, I think that TDY overall will have an easier time as well, establishing similar partnerships.
Upcoming Report
We aren't far off until TDY posts its Q2 report for 2023. On July 26 TDY will release its results, and expectations are that TDY will post a decent QoQ growth for the EPS. Estimates sit at $3.86 per share.
EPS History (Seeking Alpha)
In Q1 of 2023 , TDY recorded sales of nearly $1.4 billion, a 4.7% YoY growth. If we continue seeing similar results for the next quarter, then I think the share price will continue trading at the multiple it does.
FCF Results (Q1 Report)
But perhaps the quarter wasn't all about the revenues and earnings, but rather the fact that TDY generated significant amounts of cash flows. Netting $178 million in adjusted FCF is a solid improvement from the $58 million a year prior. This showcases that maybe TDY is going to avoid share dilution as a means to raise capital. Rather, tapping into the FCF is a better and more shareholder-friendly approach for the business.
In the last report, TDY also provided investors with some insight as to how they expect the Q2 results to pan out. EPS estimates sit at $3.76 - $3.88. The street estimates are on the higher end of that spectrum, and a beat I think would set off the share price. But a disappointment would most like cause a quite significant value compression for TDY. As mentioned earlier, the p/e sits around the 25x mark, and if TDY nets an EPS lower than what is anticipated, a p/e of 22 might be applied instead. That would be more reflective of where the sector is trading at.
The CEO Robert Mehrabian highlighted some of the markets driving growth in the last quarter," Our healthcare-focused imaging businesses achieved all-time record sales and even stronger orders, while our longer-cycle marine, aerospace and government businesses, collectively, also performed well. Our shorter-cycle commercial imaging and instruments businesses remained resilient with sales in the majority of product families increasing compared with last year ".
In my opinion, this highlights why TDY can remain strong through softener market environments. With a diversified set of end markets, they limit the downside risk of significant revenue declines. Susceptible to broad market declines rather than one single end market highlights why TDY is so appealing.
Financials
Despite performing an $8 billion deal back in 2021 that increased the debt position that TDY had quite significantly, the company still looks to be in a very good position financially, and I don't expect them to face any significant challenges paying the debt down. As we highlighted earlier, the FCF is over $200 million for just the first quarter of 2023.
Balance Sheet (Earnings Report)
The deal made the long-term debts grow to over $4 billion, but they have since decreased to around $3.5 billion instead. This is a solid improvement and TDY remains on track to quickly reduce it and limit the financial leverage they have. When dividing the net debt with the TTM EBITDA, we get a ratio of 2.6. This is perhaps on the higher end of where I am comfortable with. But seeing as TDY has $660 million in cash and an FCF margin of nearly 15% the likelihood of failing to pay debt seems very low. This makes it more acceptable to be on the higher end of this equation. In conclusion, TDY has a very solid balance sheet that doesn't showcase any significant risks at the moment.
Valuation
Valuation-wise, I actually think that TDY offers a very reasonable premium right now. It's 13% below the sector's average p/e and 24% below its own historical p/e. Besides, with the last earnings report beating on both the top and bottom lines, it suggests that paying a p/e of 21 is fair. Consistency and good performance should result in a higher price.
When comparing TDY to some other companies in the sector like Cognex Corporation ( CGNX ) TDY comes out ahead I think. CGNX mostly focuses on machine vision products but has seen its share price run up quickly recently. Paying over 50x earnings multiple is too high, even if the margins are very good.
Risks
The risk that faces TDY right now seems to be how it would properly handle the market environment when the cyclicality of the industry kicks in. Short-term demand should be expected to come in waves, and TDY needs to position itself efficiently to satisfy it.
For investors, though, it seems that TDY hasn't quite been able to stop diluting shares. In the last 5 years, the shares outstanding have increased by 5.8% yearly. This is a worrying amount, and it might pick up during a period of softened demand as TDY appears to view this as a reliable way to raise capital.
Final Words
TDY with its subsidiaries focuses on enabling technological growth for various industries. The focus markets are in The United States, but it also has a strong international presence. The company made a deal back in 2021 where they acquired FLIR systems for $8 billion. This has strengthened the revenue growth of the business and TDY now boasts solid margins. The momentum seems to persist and even with a 25x FWD p/e, I find the company appealing to invest into. As a result, I am rating TDY a buy now.
For further details see:
Teledyne Technologies: Solid Growth Still On The Back Of The FLIR Deal