Here’s Why Markets Are Willing To Value Teleflex Stock At A Premium


TFX Stock - Here’s Why Markets Are Willing To Value Teleflex Stock At A Premium

After trading at a “double bottom” at around $230, Teleflex Inc. (NYSE:TFX) attracted more buying activity after presenting at the JPMorgan Chase (NYSE:JPM) health care conference in early January. The firm has a strong, steady business in selling supplies to emergency care facilities. And while the TFX stock price reflects the growth expectations after closing at ~$260, investors should look at this medical instruments provider.

Teleflex generated sales of $2.15 billion in FY 2017. In Q3/2018, revenue grew by 5.6% in a period that is usually seasonally weak. Teleflex forecast Q4 performance and estimated it will grow 5%-5.5% for the full-year 2018. Management is on track with its business growth plan. Its acquisition of UroLift brought in $49 million in revenue, up 45% year-on-year. The prostate treatment unit accomplished growth despite supply issues during the second quarter.

Adjusted gross and operating margins was 57% and 26%, respectively. For the year, Teleflex believes EPS will come in at between $9.80 to $9.95. This values TFX stock at a 26 times forward earnings.

Teleflex is expected to report fourth-quarter earnings on January 31 before market open.

Growth From Acquisitions

Markets are willing to value TFX stock at a premium because of the company’s global growth ambitions. For example, NeoTract is another acquisition that will add 3% to the company’s fourth-quarter revenue. With NeoTract’s urology devices and Vascular Solutions adding positively to performance, Teleflex forecasts organic revenue growing 6% to 7% for the next three years (through to 2021).

Growth in China is a notable achievement. While firms in the technology sector faced a slowing business in the region, Teleflex bucked the trend. Revenue expanded by around 14%, driven primarily by the decision to take the business direct in 2017. This led to higher sales volume. It stands to reason that if U.S.-China trade relations improve, Teleflex will benefit indirectly.

4 Levers to Sustain Growth

Besides strategic mergers and acquisition activity, Teleflex has four ways to sustain and consistent growth. It’s investing in key disease states, launching new products, growing utilization of its products, and leveraging its global infrastructure. If all of these catalysts play out, markets will treat TFX stock as a high-growth company, not just a medium-growth one. Investors have a single measure that differentiates Teleflex’s growth: the rate of operating margin expansion.

Teleflex has identified catheter complications, anesthesia, and percutaneous laparoscopy as a few key disease states and markets. In many ways, this market is immune to economic health because demand for the medical instruments will not change.

There’s also a strong management team running Teleflex. It has a good track record of creating value from its acquisitions. Essential Medical and QT Vascular were its latest acquisitions, done in 2018. Still, the company faces external risks that are out of its control. Unfavorable exchange rates and tariffs on China resulted in operating margins getting trimmed very slightly. Once the U.S. and China reach a trade deal, Teleflex may raise its profit expectations for the next few years.

Bottom Line on TFX Stock

Analyst opinions are one way to get an idea of what Teleflex stock is worth. According to Tipranks, four analysts covering the stock have a price target of $310, implying an upside of 20%. The dearth of mainstream coverage on the company is potentially positive: not many investors will know about TFX stock. Conversely, its presentation at JP Morgan attracted many buyers, as trading volume topped 10 million shares recently.

As of this writing, the author did not hold a position in any of the aforementioned securities.

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