2023-03-30 11:07:38 ET
Summary
- Teleflex focuses on the sale of medical technology products, generally used in hospitals and health centers.
- I think that development and innovation in new products, expansion of technologies, and the use of existing products in new markets could bring revenue growth generation.
- I would also pay special attention to the improvements in the area of Surgical Stapling mainly in Asia, where the company exceeded expectations, and expects momentum to continue into 2023.
- The assumptions for my financial model include expansion of the profit margin thanks to an enhancement of the market share in international markets and optimization of the commercial performance.
Teleflex Incorporated ( TFX ) delivered optimistic guidance for the year 2023, and projects the revenue momentum from the sale of Urolift Systems in Japan to continue. In my view, considering double digit sales growth from interventional, surgical, and OEM, I believe that future free cash flow would imply higher price marks than the current market price. Even considering failed promotion of products, failed acquisitions, or problems with regulators, my DCF model indicated that TFX is undervalued.
Teleflex: Geographically Diversified And Many Products For Very Different Medical Purposes
Teleflex focuses on the sale of medical technology products, generally used in hospitals and health centers.
The company deals with the development, research, manufacture, and subsequent sale of non-reusable products that are part of common treatments or activities in medical facilities, such as common diagnoses or surgeries of critical application. Sales of these products are made directly to hospitals or medical institutions, through the company's sales channels and independent international distributors. Teleflex has its production plants in the United States, the Czech Republic, and Mexico.
By the end of 2022, the company had employees in 32 different countries. 4,000 of these employees are concentrated in the USA. 58% of these employees are part of the productive force in factories and manufacturing facilities, 24% are assigned to the commercial organization of the company, and 18% are in corporate operations. If we talk about the percentages of its clients, in the last three years, more than 90% of the sales were destined to health centers and hospitals, while 9% to different manufacturers of the medicinal market, and the small remaining percentage to care for home.
Teleflex has four operating segments, distributed according to their geographic operations: Americas, Asia and the Pacific, Europe, Africa, and the Middle East, and the last segment is dedicated to original equipment manufacturing. The three geographic segments have all the products included in the company's portfolio, although the demands and percentages of products are different in each of these segments. Among these products we find vascular access valves, tools for surgical interventions, products to anesthetize patients, products for urology intervention, and breathing products among others.
Source: Annual Report
In the original equipment segment, the company designs, develops, and offers its products to other manufacturers of elements for the health area that later form part of technologies such as respirators, medical beds, and stabilizers among others.
In my view, it is worth noting that Teleflex would most likely go through a period of international crisis a bit better than other peers because of its international diversification. I believe that future revenue growth may not be as volatile as that of other smaller competitors. Besides, the fact that Teleflex offers a long list of products to assess and treat different conditions means that the global market opportunity is large.
The global medical devices market is projected to grow from $495.46 billion in 2022 to $718.92 billion by 2029 at a CAGR of 5.5% in forecast period, 2022-2029. Source: FortuneBusiness
Beneficial Quarterly Results And Promising Guidance For 2023
I believe that the most recent quarterly release was beneficial with constant currency sales growth of 3.7% y/y driven by strong performances from interventional, surgical and OEM. Sales included constant currency growth of 13.4%, 10.4%, and 12% from interventional, surgical, and OEM respectively.
Source: Quarterly Presentation Source: Quarterly Presentation
I believe that it is worth having a quick look at the guidance given by management. Management believes that constant current sales growth of 4.75%-6.25% makes sense. Besides, it expects adjusted EPS of $13 to $13.6.
Source: Quarterly Presentation
In the best case scenario, the company believes that an adjusted gross margin of 59.5%, adjusted operating margin of 26.75%, and EPS growth close to 4.1% are appropriate. Considering the current macroeconomic environment and previous financial figures of Teleflex, I believe that the figures are overall quite optimistic.
Source: Quarterly Presentation
Balance Sheet And Net Debt Assessment
The balance sheet did not change much as compared to that from the year 2021. Teleflex reported a bit less cash because the total amount of long term debt decreased a bit. In my view, the balance sheet continues to be solid with an asset/liability ratio of more than 2x and current liabilities/current assets of more than 3x.
As of December 31, 2022, the company reported cash and cash equivalents of $292 million, accounts receivable of $408 million, inventories worth $578 million, prepaid expenses of $125 million, and prepaid taxes close to $6 million. Finally, total current assets were equal to $1.410 billion.
Besides, property, plant and equipment was equal to $447 million with operating lease assets of $131 million, goodwill of $2536 million, intangibles assets of $2306 million, and total assets of $6.928 billion.
Source: Annual Report
The net debt includes current borrowings of $87.5 million, long-term borrowings of $1.624 billion, and cash worth $292 million, implying net debt of $1.431 billion.
Source: Annual Report
The liabilities include current borrowings worth $87 million, accounts payable of $126 million, accrued expenses of $140 million, and other current liabilities worth $63 million. Total current liabilities were equal to $581 million.
The long-term liabilities included long-term borrowings of $1.624 billion, deferred tax liabilities of $388 million, noncurrent operating lease liabilities of $120 million, and total liabilities of $2.906 billion. Note in the image below how the company paid some of its total long-term borrowings.
Source: Annual Report
Assumptions In My Financial Model
The assumptions for my financial model include expansion of the profit margin thanks to an enhancement of the market share in international markets and optimization of the commercial performance. In my opinion, if global operations increase, certain economies of scale will likely play a role, and may bring FCF margin improvements. In this regard, the following text was obtained from a recent annual report.
Achievement of economies of scale as we continue to expand by utilizing our direct sales force and distribution network to sell new products, as well as by increasing efficiencies in our sales and marketing organizations, research and development activities and manufacturing and distribution facilities. Source: Annual Report
Additionally, I think that development and innovation in new products, expansion of technologies, and the use of existing products in new markets could bring revenue growth generation. Besides, inorganic growth could also enhance the portfolio. Considering the total amount of goodwill, I believe that management has sufficient expertise in the M&A markets.
Expand the product portfolio through acquisitions; scale at the commercial level by improving sales strategies and the effectiveness of sellers. In the year 2022 alone, Teleflex expanded the line of various products and included 6 new products in its portfolio, as an example of where they are targeting their investment and development capabilities. Source: Annual Report
I would also pay special attention to the improvements in the area of Surgical Stapling mainly in Asia, where the company exceeded expectations, and expects momentum to continue into 2023. If the Urolift System was successful in Japan, I believe that it may also be successful in China, where new commercial efforts are taking place.
On a side note, the surgical stapling devices market size is close to $11 billion, and the market is expected to grow at a CAGR of 8.4% from now to 2030. In my view, if Teleflex continues to invest in this new market, and enters new regions, we may see sales grow accelerating a bit more than the general global medical device market.
Surgical Stapling Devices market size is expected to reach at USD 11,442 million by 2030, registering a CAGR of 8.4%, owing to increasing desire for minimally invasive surgery. Source: Acumen Research and Consulting
My Financial Model
I assumed that Teleflex will likely experience net income growth and FCF from now to 2033. My numbers for the future include 2033 net income of $555 million, depreciation expense of $75 million, intangible asset amortization expense close to $165 million, and deferred income taxes close to $65 million. Besides, with prepaid expenses and other current assets close to $175 million and changes in accounts payable close to $355 million, 2033 CFO would be close to $1150 million. Finally, if we also assume capex of -$41 million, 2033 free cash flow would be around $1110 million.
With a WACC of 9% and an EV/FCF ratio of 27.5x, I obtained an enterprise value of 14.5 billion. If we also include net debt of close to $1.435 billion, the implied equity would be close to 13.08 billion, and the implied price would stand at $278.5 per share.
Competitors And Risks
The company operates in a highly competitive market, in which a large number of companies participate, from historical manufacturers in the market to start-ups that specify their development on a line of products. In addition, this market appears to receive permanent inclusion of innovations through technological developments and digital applications. Recognition, the price-quality ratio, the uses available, and the acceptance by customers seem to be determining factors in this market. Management offered the following words about the risks of the market.
The medical device industry is highly competitive. We compete with many domestic and foreign medical device companies ranging from small start-up enterprises that might sell only a single or limited number of competitive products or compete only in a specific market segment, to companies that are larger and more established than us, have a broad range of competitive products, participate in numerous markets and have access to significantly greater financial and marketing resources than we do. Source: Annual Report
There seems to exist a large number of regulations that exist on health products and in general in the area of ??medicine. In the United States, for instance, the FDA usually has to approve the medical devices designed by Teleflex. If, in the future, the FDA requires more research to be done, or more patients to be tested, the company may suffer a deterioration of its margins.
All of our medical devices manufactured or distributed in the U.S. are subject to requirements set forth by the Federal Food, Drug, and Cosmetic Act and regulations promulgated by the FDA under the FDC Act, which are enforced by the FDA. The FDA and, in some cases, other government agencies administer requirements for the methods used in, and the facilities and controls used for, the design, manufacture, packaging, labeling, storage, installation, servicing, marketing, importing and exporting of all finished devices intended for human use. Source: Annual Report
Also, the conditions of health coverage and the provision of this type of service vary widely depending on the region, the governments, and the laws of each country. In this sense, the reformulations of the medical systems could also cause conflicts in the operations and the infrastructure of the company.
Additionally, there is the possibility of a break in the supply chain for manufacturing, the loss of material or information related to technological developments, and, to a lesser extent, possible emerging complications in manufacturing or labor conditions. For instance, an increase in salaries in the Americas, Asia, or Europe could significantly reduce the FCF margins of Teleflex.
Finally, it is worth noting that the company may fail to introduce products in new markets for a variety of reasons. Even if regulators approve the medical device in the country, doctors may decide not to use the product, or patients may be reluctant to accept the treatments. Besides, legal actions against the third parties that work with Teleflex in some countries could stop some of the treatments offered by Teleflex. The Sterigenics U.S., LLC is a clear case, but there are many others.
One of our contract sterilizers, Sterigenics U.S., LLC, uses ethylene oxide in its sterilization process. During the fourth quarter of the year ended December 31, 2019, operations at the Smyrna facility were suspended by state and local officials due to issues associated with the facility's use of ethylene oxide in its sterilization operations, but have since reopened. In December 2020, the New Mexico Attorney General initiated legal proceedings involving the Santa Teresa facility, alleging that its operations have resulted in impermissible ethylene oxide emissions. Source: Annual Report
My Takeaway
Teleflex delivered beneficial guidance for the year 2023 and optimistic results in Q4. Management was especially optimistic about the development of its Urolift System in Japan, where revenue momentum is expected to continue in 2023. In my view, if the Urolift System is also well accepted in China, where commercial activity recently commenced, we may see revenue growth from Surgical Stapling. Besides, considering double digit sales growth from interventional, surgical, and OEM, I believe that future free cash flow would justify a valuation of more than $279 per share. I did see some risks from product introduction in new markets or risks from regulators, however the stock could trade at higher price marks.
For further details see:
Teleflex: Product Launches In Asia And FCF Could Imply Undervaluation