Is Teledyne Stock A Buy?

Above expectation results, good cash flow, manageable debt, and products for high-growth markets make Teledyne Technologies worth a serious look.

Teledyne Technologies Incorporated [NYSE: TDY] is an American industrial conglomerate that provides technologies for a variety of industrial growth markets.

The company provides aerospace and defense electronics, digital imaging products and software; monitoring instrumentation for marine and environmental applications and components; harsh environment interconnect products, and subsystems for wireless and satellite communications.

Teledyne operates in North America, Europe, South America, Australia, Asia, and internationally. The company derives roughly 25% of its revenue from contracts with the United States government.

Other key customers include major industrial and communications companies, aerospace prime contractors and general aviation companies.

The instrumentation segment is the largest revenue generator for the company, and provides monitoring instruments primarily for marine and environmental applications. The company was founded in 1960 and is headquartered in Thousand Oaks, CA.

Is Teledyne Stock A Buy?

Teledyne beat earnings expectations in Q4 2020 despite falling sales, as stronger engineered-systems revenue compensated for the revenue decline in its aviation and imaging businesses.

The scientific and technical instruments company reported $3.48 earnings per share for the quarter, an increase of 20.42% over the past year, topping the consensus estimate of $3.11 by $0.37.

Teledyne earned $809.30 million during the quarter, down 2.98% from the same period last year. Analysts were expecting revenue of $800.15 million. Instrumentation segment witnessed a sales decline of 6.2% in the fourth-quarter in comparison to the same period last year. 

Digital Imaging segment sales weakened over 2%, dragged down by lower sales of X-ray detectors for dental and medical imaging.

In the Aerospace and Defense segment, fourth quarter sales declined 14.8%, as greater US defense sales were more than offset by a 45% decline in sales of commercial aerospace products. 

Engineered Systems segment was the outperformer, as the fourth quarter revenue increased 26.8%, primarily due to greater sales from defense, nuclear and other manufacturing programs as well as electronic manufacturing services.

Record free cash flow, that is cash from operating activities less capital expenditures, was $217 million in the fourth quarter of 2020, compared with $144 million in 2019. Cash flow is important, as it enables organizations to expand their businesses without depending on expensive external funds.

The company ended the quarter with $105.4 million of net debt, but given its strong cash position, analysts are confident it can manage its debt safely.

Top management expects continuing recovery in its commercial businesses as well as growth in government businesses, with Digital Imaging segment leading the charge. The company, wary of the ongoing tug of war between shutdowns and vaccines, is forecasting organic growth to be between 5% and 6% for 2021.

Going forward, the management believes that earnings per share in the first quarter of 2021 will be in the range of $2.55 to $2.60 per share. And for the full year 2021, EPS is expected to be between $11.25 and $11.45. Teledyne received record orders in the fourth quarter and ended 2020 with year-end backlog of $1.7 billion.

The company’s revenue has grown at a CAGR of 6.42% in the past ten years. Analysts believe revenue will continue to grow at such a rate in the next five years.

Teledyne Acquisition of FLIR

As per the company’s top management, Teledyne had been watching FLIR, ever since it entered the space-based Infrared imaging market in 2006 when it acquired Teledyne Scientific and Imaging.

Both, Teledyne and FLIR, sell cameras and sensor systems. Teledyne recently announced its decision to buy thermal imaging camera supplier FLIR Systems Inc [FLIR] in an $8 billion cash-and-stock deal to beef up its portfolio of sensor imaging  technology for the defense industry.

The deal is expected to close in the middle of the year. Teledyne products are used in the Boeing [BA] Space Launch System for NASA. FLIR and Teledyne provide components for the Lockheed Martin [LMT] F-35.

“Our technologies and products are uniquely complementary with minimal overlap, having imaging sensors based on different semiconductor technologies for different wavelengths,” Teledyne Executive Chairman Robert Mehrabian said.

Teledyne is poised for strong earnings growth. Surging profits are of great interest to investors as they point towards stock price gains and better ROI.

The historical EPS growth rate for Teledyne is 19.1%, and the company is expected to put up a strong show with projected EPS growth of nearly 8% this year, roughly double than the industry average of over 4%.

Add to that impressive cash growth and overall upward earnings estimate revision, and the overall picture looks pretty rosy for Teledyne’s stock.

Risks Of Investing In Teledyne Technologies

The primary risk associated with Teledyne relates to the market it operates in. The California-based conglomerate serves the markets of aerospace and defense, medical imaging and pharmaceutical research, electronics design and development, and oceanographic research, to name a few.

Almost all of these sectors are characterized by swift technological evolvement and rapidly developing industry standards. What it means is that Teledyne has to be always on its toes to stay ahead of the game.

If a particular technology or an industry standard related to one or more of Teledyne’s products changes faster than anticipated, it can prove to be catastrophic for the company as it means millions of dollars gone down the drain. This could severely affect the company’s revenue, leading to a weakened balance sheet and falling share prices.

Also, the market served by Teledyne is dotted with several large and small players and is fiercely competitive.

It means the company, apart from competing on product superiority, also needs to compete on price. The conglomerate, as such, has to keep investing in new technologies and lay more emphasis on R&D in order to lower manufacturing and other costs related to its products.

Additionally, Teledyne’s liabilities total more than the combination of its cash and short-term receivables. But the good news is that the conglomerate, with market capitalization of more than $14 billion, can easily manage these liabilities.

Teledyne Has A Slew Of Competitive Threats

Teledyne is a large conglomerate operating in different markets and segments, where it has to contend with different competitors. Because of the diversity of products sold and the number of markets Teledyne serves, it encounters a wide variety of competitors.

Also, it is not uncommon for firms operating in defense sectors to be rivals as well as collaborators on certain projects. In fact, it is a common trend in the defense industry for work on programs to be shared among a number of companies, including competitors.

Teledyne’s technological capabilities and innovation, and the ability to invest in the development of new and enhanced products, allows it to compete effectively in its markets on the basis of quality, product performance and reliability, technical expertise, price and service. 

Having said that, there are competitors of Teledyne with greater name recognition, a larger and more diverse product portfolio, and more extensive engineering, manufacturing, marketing and distribution capabilities.

Here we look at a few top competitors of Teledyne, including TransDigm Group [TDG], Rockwell Automation [ROK], Lockheed Martin [LMT], Northrop Grumman [NOC], General Dynamics [GD], and National Instruments, to name a few.

TransDigm develops and manufactures aerospace components for defense and commercial aerospace customers.  Planes are kept in service for decades, which means constant requirement for replacement parts.

TDG derives its competitive advantage from supplying spare parts that are either patent-protected or difficult to manufacture. Over 75% of the company’s sale in the recent quarter came from products for which it is the sole supplier. This is the reason for company’s walloping revenue over the past decade.

On the flip side, the company carries a substantial $22 billion in total debt, which many critics say is unsustainable in the longer run.

Also, the stock lost around 40% of its value in March, when the pandemic was its peak, but since then has recovered much of what it lost in the early days of the pandemic.

About 80% of TransDigm’s total costs are variable, which provided the company the leverage to adjust its spending, keeping within its eyesight the falling demand.

Badly bruised and battered by the pandemic, it is unlikely that flight operators will order new planes in bulk in near future. Larger number of old planes in the service is what plays into TransDigm’s focus on the aftermarket.

Honeywell International Inc. [NYSE: HON] is an American multinational conglomerate that provides aerospace products and services, control, sensing and security technologies for commercial buildings, homes and industry.

Lockdowns and stay-at-home orders greatly boosted e-commerce. The contagion also compelled organizations to pay more attention to automation. Honeywell’s Intelligrated (warehouse automation largely for e-commerce facilities) is witnessing rapid growth. 

It looks like both, Honeywell and TE Connectivity, are going to derive a lot of benefits in 2021 from the growing trend towards investing in automation.

On the earnings front, Honeywell reported $2.07 EPS for the fourth quarter against analysts’ estimates of $2.00. The conglomerate’s revenue was $8.90 billion for the quarter, compared to analyst estimates of $8.39 billion, which attests to Honeywell’s ability to rise to the challenge created by the pandemic.

Honeywell operates in four segments and it has significant growth potential in all the segments. Like TE Connectivity, its valuation is also stretched a bit, but the company has strong businesses with potential for outperformance, which justifies a premium valuation.

Rockwell Automation is a global provider of industrial automation products and information solutions for manufacturers.

Over the last five years, Rockwell Automation stock has jumped more than 150%. Rockwell now expects its full-year 2021 organic sales to grow between 4.5% to 7.5%, courtesy its exposure to the fast-growing automation markets.

Northrop Grumman has decided to sell bulk of its IT division to concentrate more exclusively on its array of aerospace and space assets.

The company supplies the US military with nearly 60 percent of its airborne radar systems, including the AWACS system.

In doing so, the defense contractor has decided to move in the footsteps of Lockheed Martin while moving in the opposite direction of General Dynamics. Northrop has more debt than either Lockheed or GD, and the sell will allow it to focus more on some key projects.

Is Teledyne Stock A Buy? The Bottom Line

The company develops several high-growth products for aerospace and defense electronics, factory automation, satellite communications and digital imaging market.

Teledyne enjoys market dominance in test and measurement equipment, including high-performance oscilloscopes and high-speed protocol analyzers.

Reports suggest that the market for the overall test and measurement equipment market is expected to grow from $25.7 billion in 2018 to $ 32.3 billion by 2024, at a CAGR of 3.90%. It means the company’s revenue will also grow accordingly.

And this is not the only segment from which Teledyne is expected to reap rich dividends. Teledyne’s digital imaging solutions consist of high-performance image sensors, smart cameras and systems, along with LIDAR systems for airborne terrestrial mapping, mobile mapping and laser-based 3D imaging applications.

The market for digital imaging products is projected to reach $ 28.45 billion by 2026, growing at a CAGR of 8.46% from 2019 to 2026, thus significantly adding to Teledyne’s digital imaging revenue.

The company’s overall revenue has been growing at a CAGR of 6.42% in the past decade, and experts believe that the company will continue to deliver at the same pace in the foreseeable future.

Teledyne is a leading player in the industrials sector, and all set to be a prime beneficiary of quickly growing instrumentation and digital imaging market. The stock is fairly valued compared to its competitors and, with attractive growth prospects, looks a tempting proposition.

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The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.