Rating Update: Stock Rating C-Neutral (1/2/20)-Teleflex Inc (TFX).

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BUSINESS

Teleflex Incorporated designs, develops, manufactures, and supplies single-use medical devices for common diagnostic and therapeutic procedures in critical care and surgical applications worldwide. It offers vascular access products that comprise Arrow branded catheters and related devices, including catheter positioning systems for use in the administration of intravenous medications and other therapies, the measurement of blood pressure, and the withdrawal of blood samples through a single puncture site; and devices for treating coronary and peripheral vascular disease. The company also provides interventional access products that are used in dialysis, oncology, and critical care therapies; and cardiac care products, such as diagnostic and intra-aortic balloon catheters, and capital equipment.
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INVESTMENT RATING

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Reflecting future returns on capital that are forecasted to be above the cost of capital, TFX is expected to continue to be a major Value Builder.

Teleflex has a current Value Trend Rating of C (Neutral).
This rating combines very contradictory signals from two proprietary PTR measures of a stock’s attractiveness. Teleflex has a poor Appreciation Score of 21 but a good Power Rating of 80, with the Neutral Value Trend Rating the result.

Teleflex’s stock is selling significantly above targeted value. The current stock price of $378.49 compares to targeted value 12 months forward of $239.
Teleflex’s low appreciation potential results in an appreciation score of 21 (79% of the universe has greater appreciation potential.)
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Teleflex has a Power Rating of 80. (TFX’s good Power Rating indicates that it has a higher likelihood of achieving favorable investment performance over the near to intermediate term than all but 20% of companies in the universe.)
Factors contributing to this good Power Rating include: recent price action has been favorable; and earnings estimate behavior for TFX has been slightly favorable recently. An offsetting factor is is in a slightly weakened position current.

INVESTMENT PROFILE

Teleflex’s financial strength is average. Financial strength rating is 56.
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Relative to the S&P 500 Composite, Teleflex Inc has neutral Growth/Value characteristics; its appeal is likely to be to Capital Gain-oriented investors; the perception is that TFX is normal risk. High expected growth is a positive for Teleflex. Low historical growth is a relative weakness for Teleflex. Teleflex’s valuation is high: low dividend yield, high P/E ratio, and high price/book ratio. TFX has low market capitalization.

CURRENT SIGNALS

Teleflex’s current operations are strong. Return on equity is rising, reflecting: improving asset utilization; and rising tax keep rate.

Teleflex’s current technical position is very strong. The stock price is in a 16.6 month up move. The stock has appreciated 63.4% from its prior low. The stock price is above its 200 day moving average which is in an uptrend.

ALERTS

Important positive changes in Teleflex Inc (NYSE: TFX) investment behavior have recently occurred: positive upside/downside volume developed.
The stock is currently rated C.
Teleflex Inc (NYSE: TFX) stock closed at $0.61 on 1/2/20 after a major increase of 12.1%. This advance was accompanied by normal trading volume. Relative to the market the stock has been exceptionally strong over the last nine months and has risen 1.1% during the last week.

CASH FLOW

In 2018, Teleflex generated a slight increase in cash of +$23.6 million (+7%). Sources of cash were slightly larger than uses. Cash generated from 2018 EBITDA totalled +$686.0 million. Non-operating uses consumed -$153.3 million (-22% of EBITDA). Cash taxes consumed -$18.7 million (-3% of EBITDA). Re-investment in the business amounted to -$209.6 million (-31% of EBITDA). On a net basis, debt investors pulled out -$193.7 million (-28% of EBITDA) while equity investors received -$87.0 million (-13% of EBITDA).
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Teleflex’s Non-operating Income, %EBITDA has exhibited a volatile overall uptrend over the period. This improvement was accompanied by an opposite trend for the Teleflex Inc Peer Group. (Since 2014 Non-operating Income, %EBITDA has experienced a very sharp decline.) In most years, Teleflex was in the second quartile and lower quartile. Currently, Teleflex is lower quartile at -22% of EBITDA (-$153.3 million).

Teleflex’s Cash Taxes, %EBITDA has exhibited little to no overall change over the period. This stability was accompanied by stability for the Teleflex Inc Peer Group as well. In most years, Teleflex was in the top quartile and second quartile. Currently, Teleflex is above median at -3% of EBITDA (-$18.7 million).

Teleflex’s Business Re-investment, %EBITDA has suffered a volatile overall downtrend over the period. This downtrend was accompanied by an opposite trend for the Teleflex Inc Peer Group. In most years, Teleflex was in the top quartile and second quartile. Currently, Teleflex is above median at -31% of EBITDA (-$209.6 million).

Teleflex’s Debt Investors, %EBITDA has experienced a very strong overall uptrend over the period. This improvement was accompanied by a similar trend for the Teleflex Inc Peer Group. In most years, Teleflex was in the lower quartile and third quartile. Currently, Teleflex is substantially below median at -28% of EBITDA (-$193.7 million).

Teleflex’s Equity Investors, %EBITDA has suffered a very strong overall downtrend over the period. This downtrend was accompanied by a similar trend for the Teleflex Inc Peer Group. In most years, Teleflex was in the second quartile and top quartile. Currently, Teleflex is upper quartile at -13% of EBITDA (-$87.0 million).

Teleflex’s Change in Cash, %EBITDA has experienced a volatile overall downtrend over the period. This downtrend was accompanied by stability for the Teleflex Inc Peer Group. In most years, Teleflex was in the lower quartile and top quartile. Currently, Teleflex is slightly above median at +3% of EBITDA (+$23.6 million).
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Teleflex’s Cash, %Revenue has exhibited little to no overall change over the period. This stability was accompanied by stability for the Teleflex Inc Peer Group as well. (Since 2016 Cash, %Revenue has experienced a very sharp decline.) In most years, Teleflex was in the third quartile and lower quartile. Currently, Teleflex is below median at +15%.

PROFITABILITY

Teleflex’s return on equity reached a new post-2009 high in 2019.
This was due to very strong positive trend in pretax operating return supported by strong positive trend in non-operating factors.
The productivity of Teleflex’s assets declined over the full period 2009-2019: asset turnover has experienced a downtrend but it experienced a very sharp recovery after the 2017 low.
More than offsetting this trend, however, pretax margin enjoyed a volatile overall uptrend even as it recently stabilized from the 2013 level.
Non-operating factors (income taxes and financial leverage) had a significant positive influence on return on equity.
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Teleflex’s return on equity is at the upper quartile (15.5%) for the four quarters ended September, 2019.
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Operating performance (pretax return on assets) is at median (5.4%) reflecting asset turnover that is below median (0.41X) and slightly above median pretax margin (13.1%).
Tax “keep” rate (income tax management) is upper quartile (131.9%) resulting in after tax return on assets that is at the upper quartile.
Financial leverage (leverage) is slightly above median (2.19X).

GROWTH RATES

There are no significant differences between Teleflex’s longer term growth and growth in recent years.
Teleflex’s historical income statement growth has been in line with balance sheet growth. Revenue growth has paralleled asset growth; earnings growth has paralleled equity growth.

Annual revenue growth has been 2.2% per year.

Total asset growth has been 3.9% per year. (More recently it has been 13.8%.)

Annual E.P.S. growth has been 8.1% per year.

Equity growth has been 3.4% per year.

Teleflex’s consensus growth rate forecast (average of Wall Street analysts) is 14.0% — substantially above the average of the historical growth measures.
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Relative to the Teleflex Inc Peer Group, Teleflex’s historical growth measures are erratic. E.P.S. growth (8.1%) has been below median. Equity growth (3.4%) has been at the lower quartile. Revenue growth (2.2%) has been lower quartile. Total asset growth (3.9%) has been lower quartile.

Consensus growth forecast (14.0%) is above median.
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PRICE HISTORY

Over the full time period, Teleflex’s stock price performance has been exceptional. Between March, 2009 and January, 2020, Teleflex’s stock price rose +868%; relative to the market, this was a +137% gain. Significant price moves during the period: 1) October, 2016 – January, 2020: +164%; and 2) August, 2010 – August, 2016: +281%.
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TOTAL INVESTMENT RETURNS

Current annual total return performance of 46.3% is upper quartile relative to the S&P 500 Composite.
In addition to being upper quartile relative to S&P 500 Composite, current annual total return performance through December, 2019 of 46.3% is at the upper quartile relative to Teleflex Inc Peer Group.

Current 5-year total return performance of 27.7% is upper quartile relative to the S&P 500 Composite.
Through December, 2019, with upper quartile current 5-year total return of 27.7% relative to S&P 500 Composite, Teleflex’s total return performance is upper quartile relative to Teleflex Inc Peer Group.
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VALUATION BENCHMARKS

Relative to S&P 500 Composite, TFX’s overall valuation is quite high. Four of five factors are lower quartile. The highest factor is the ratio of enterprise value/revenue, followed by the ratio of enterprise value/earnings before interest and taxes, then by the ratio of enterprise value/assets, then by the price/equity ratio. The lowest factor, price/earnings ratio, is upper quartile.

Relative to Teleflex Inc Peer Group, TFX’s overall valuation is quite high. The highest factor, the price/equity ratio, is upper quartile. Ratio of enterprise value/revenue is at the upper quartile. Ratio of enterprise value/assets is upper quartile. Ratio of enterprise value/earnings before interest and taxes is at the upper quartile. The lowest factor, the price/earnings ratio, is slightly above median.
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Teleflex has a major value gap compared to the median valuation. For TFX to achieve median valuation, its current ratio of enterprise value/revenue would have to fall from the current level of 7.59X to 5.22X. If TFX’s ratio of enterprise value/revenue were to fall to 5.22X, its stock price would be lower by $-131 to $248.
For TFX to fall to lower quartile valuation relative to the Teleflex Inc Peer Group, its current ratio of enterprise value/revenue would have to fall from the current level of 7.59X to 3.77X. If TFX’s ratio of enterprise value/revenue were to fall to 3.77X, its stock price would decline by $-211 from the current level of $378.

VALUE TARGETS

Reflecting future returns on capital that are forecasted to be above the cost of capital, TFX is expected to continue to be a major Value Builder.
Teleflex’s current Price Target of $239 represents a -37% change from the current price of $378.49.
Teleflex’s low appreciation potential results in an appreciation score of 21 (79% of the universe has greater appreciation potential.)
Notwithstanding this low Appreciation Score of 21, the high Power Rating of 80 results in an Value Trend Rating of C.
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Teleflex’s current Price Target is $239 (+37% from the 2018 Target of $174 but -37% from the 01/02/20 price of $378.49). This dramatic rise in the Target is the result of a +12% increase in the equity base and a +23% increase in the price/equity multiple. The forecasted increase in return on equity has a very large positive impact on the price/equity multiple and the forecasted increase in growth has a large positive impact as well. Partially offsetting these Drivers, the forecasted increase in cost of equity has a large negative impact.
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PTR’s return on equity forecast is 21.7% — slightly above our recent forecasts. Forecasted return on equity enjoyed a dramatic, steady increase between 2010 and 2018. The current forecast is significantly above the 2011 low of 9%.

PTR’s growth forecast is 8.0% — above our recent forecasts. Forecasted growth erratic but little changed between 2010 and 2018. The current forecast is well above the 2013 low of 0%.

PTR’s cost of equity forecast is 10.2% — in line with recent levels. Forecasted cost of equity suffered a dramatic, steady increase between 2010 and 2018. The current forecast is above the 2011 low of 6.5%.
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At Teleflex’s current price of $378.49, investors are placing a positive value of $232 on its future investments. This view is consistent with the company’s most recent performance that reflected a growth rate of 5.0% per year, and a return on equity of 18.6% versus a cost of equity of 9.0%.
PTR’s 2020 Price Target of $239 is based on these forecasts and reflects an estimated value of existing assets of $179 and a value of future investments of $60.

About John Lafferty 58188 Articles
During his career, John has developed valuation and stock rating methodologies, managed institutional portfolios and mutual funds, and provided equity research to institutional investors on thousands of companies. He has been Director of Research at PTR since its inception in 2004.

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