Is Teleflex Stock A Buy?

As headwinds associated with COVID-19 begin to recede, and a number of elective procedures performed start to rebound, Teleflex, with its prudent M&A activities, looks set to enjoy a good 2021.

Teleflex Incorporated [NYSE: TFX], headquartered in Wayne, Pennsylvania, is a global provider of medical technology products. The company designs, develops, manufactures, and supplies disposable medical products, surgical instruments and medical devices for a range of common diagnostic and therapeutic procedures in critical care and surgery.

Teleflex operates through a variety of business segments:

• Americas, EMEA (Europe, the Middle East and Africa),
• Asia (Asia Pacific);
• and OEM.

The company serves hospitals and healthcare providers, medical device manufacturers, and home care markets. Teleflex also makes custom medical instruments which it sells to original equipment manufacturers (OEMs).

The company, serving healthcare providers in more than 150 countries, boasts a diverse portfolio, with solutions in the fields of vascular access, interventional cardiology and radiology, anesthesia, emergency medicine, surgical, urology and respiratory care.

Its largest market is the US, accounting for 60% of its total revenue.

Teleflex Is Riding A Demographic Trend

Teleflex was founded in 1943 as an engineering company, but it was in 2011 that the company decided to function exclusively as a medical-device manufacturer.

Teleflex has been a pretty reliable and steady performer, with acquisitions and divestments being an integral part of its strategy ever since it decided to become a pure-play medical device manufacturer. The company’s tactic to concentrate solely on medical devices seemed to be a good choice given the fact the world’s population is getting older.

The company’s largest market is North America, and it expected that in the US, the senior citizen demographic is all set for a 100% increase in the next three decades.

As people grow older, they tend to require more medical care, which means a growing wave of new customers, and more opportunities for market outperformance for medical devices manufacturers like Teleflex.

Teleflex Revenues Up Over Last Decade

The company’s stock price hit rock bottom in March 2020 as the global spread of coronavirus severely dented demand for Teleflex’s products, primarily for interventional and surgical uses. These products are utilized for elective procedures and witnessed a steep decline owing to the pandemic.

However, the stock rebounded to over $400 per share, has made a spectacular comeback since the resumption of economic activities and easing of lockdowns.

Teleflex announced its quarterly earnings as well as full year results ended December 31, 2020. The medical technology company reported $3.25 earnings per share (EPS) for the quarter, topping consensus estimate of $3.05 by $0.20.

Fourth quarter 2020 net revenues were $711.2 million, an increase of 4.4% versus the previous year. Full year 2020 net revenues were $2.537 billion, a decrease of 2.2% compared to the previous year.

Full year 2020 EPS decreased 4.3% to $10.67, compared to $11.15 in the previous year. Liam Kelly, Chairman, President and Chief Executive Officer, said, “Due to the COVID-19 pandemic, 2020 was a difficult year for Teleflex. However, during the fourth quarter our business performed better than we expected as trends continued to improve across many of our product categories and geographies.”

The company has been steadily growing ever since its reincarnation as a medical devices manufacturer, with sales up from $1.5 billion a decade ago to currently over $2.6 billion. Teleflex is one of those long-term secular growth names, which can be rightly credited for generating top ROI for its long-term investors, courtesy sound positioning and M&A activities in secular growth markets.

Broadly speaking, growth falls into two categories – cyclical and secular. As the name suggests, cyclical growth is dependent on the economic cycle i.e., company performs well when the economy is performing well. In other words, its fortune is tied to expanding economies. Automobile and steel manufacturers are a good example of cyclical stocks.

Secular growth, on the other end, is less dependent on the economy as it depends upon the change in consumer behavior rather than change in the GDP, thus creating a new wave of demand, irrespective of the economic downturn. 

In other words, secular growth occurs when something fundamentally changes within a sector or industry. For example, one of the most remarkable secular growth stories of the 21st century has been the phenomenal rise of e-commerce.  

While the pandemic dealt a few severe blows to Teleflex, the company seems to set aside the setback as it continues to accelerate its growth with bolt-on acquisitions to further increase its addressable market and grow its business.

Teleflex Growth Through Acquisition A Win

But then there are analysts and experts who frown at this strategy, arguing that a business should grow through existing product/service lines rather than acquisitions, as this requires less capital and other resources.

However, the company’s strategy of growing through acquisitions has paid off well, and the medical devices company appears set for more encouraging growth.

Teleflex, on December 28^th, 2020, closed the acquisition of Z-Medica, a market leader in hemostatic products with attractive end markets.  Hemostatic products are used to prevent and stop bleeding.

Last year, Teleflex also acquired HPC Medical Products (HPC), a leader in medical tubing and wire components, for $260 million.

In 2021, the company projects revenue growth between 8% and 9.5% as compared to 2020. Teleflex expects its Interventional Urology business to increase at least 30% over 2020 levels.

Additionally, Z-Medica is expected to contribute $60 to $70 million of revenue or approximately 2.5 points of growth.

In 2020, the company generated nearly $2.6 billion in sales spread across 7 different categories. The largest segment includes vascular business, where fourth quarter revenue increased 16% to $182.5 million. 

Other segments each generate about $200-$400 million in annual sales including: interventional access, anesthesia, surgical, interventional urology, OEM and other products.

Teleflex is also expected to profit from a vigorously expanding market for intraosseous devices owing to rising instances of emergency medical conditions such as heart attacks.

Intraosseous devices provide a reliable, effective, comfortable, and safe method of delivering fluids and drugs to patients through the bone marrow.

These devices are used to provide intravenous access when medical conditions make it incredibly difficult to administer drugs and fluid the normal way, and as such, they are finding huge favor with doctors and medical practitioners.

The global intraosseous devices market is forecasted to grow at a 5.6 % CAGR from 2018 to 2026, in the process hugely benefitting medical devices manufacturers such as Teleflex. 

All in all, Teleflex looks like a safe bet with good growth rate, stable margins and prudent M&A activities with potential revenue synergy opportunities.

Teleflex Earnings Have Been Choppy 

COVID-19 will likely wreak havoc on many companies’ earnings for the next few quarters, including the medical devices companies. However, postponed procedures will likely get rescheduled at some point in the future.

Savvy healthcare investors, with a time horizon of a few years, should monitor the stocks of these medical devices companies.

The global spread of the coronavirus has meant less demand for Teleflex’s products, primarily for interventional and surgical uses, given these products are utilized for elective procedures.

Medical devices companies, including Teleflex, were not immune to the pandemic’s impact.

With this outbreak putting pressure on the number of procedures performed, there was decreased demand for Teleflex’s products.  As a result, revenues declined 12% during the second quarter of the year and 4% during the third quarter of the year. 

Also, COVID negatively impacted its adjusted gross profit by approximately $44 million in the quarter.

Additionally, the share price was highly volatile in 2020, hitting a high of $400 in February, then falling to the low $200s a few weeks later, and now trading over $400. Moreover, a few analysts feel the company’s stock is currently overvalued, though the appeal for the stock remains strong owing to good performance.

The near-term impact on the business has clearly been a negative, but then postponed procedures are gathering pace with the opening of the economy, and the business in all likelihood will boom again. 

Teleflex Competitors Are Industry Titans

Companies in the sub-industry of “health care equipment” are considered alternatives and competitors to Teleflex, including Medtronic [MDT], Boston Scientific [BSX], Intuitive Surgical [ISRG] and Stryker [SYK].

Intuitive Surgical and Medtronic are two of the biggest players in the growing field of robotic-assisted surgeries (RAS), which are used with minimally invasive surgery techniques with benefits such as minimal blood loss, faster recovery time, less pain and fewer chances of infections.

Intuitive Surgical’s da Vinci system was a pioneering tool in robotic surgeries, winning FDA’s approval for laparoscopic surgeries way back in 2000. 

Medtronic signaled its intentions of being a serious player in this ultra-fast-growing market (it is expected to witness CAGR of 21.55% through 2023) with its acquisition of Mazor Robotics in 2018.

Intuitive, ever since its inception 25 years ago, continues to grow at a healthy rate, with bulk of its revenue coming from sale of new da Vinci surgical systems as well as from maintenance of 5,800 da Vinci surgical systems it has already installed.

Over the past five years, the company’s revenue has jumped close to 90 percent. Medtronic, on the other hand, with a market cap of over $150 billion, is a more diversified business than Intuitive.

On top of that, Medtronic is a dividend aristocrat, having increased its dividends for the past 43 consecutive years. The company also has its own line of robotic surgery systems, including Stealth Autoguide cranial robotic guidance platform, the Mazor X Stealth Edition and StealthStation S8 robotic guidance systems.

Intuitive’s revenue growth continues to beat the industry average, and when elective surgeries rebound, the company’s business is expected to gather further momentum.  Medtronic’s revenue growth has been much slower, but then, given its size and diversity, it is a stock worth watching.

Another competitor, Stryker, has weathered the pandemic well, recording its 40th consecutive year of revenue growth in 2019. The company is also a good dividend payer, having increased its dividend for 10 consecutive years.

To sum it up, all these are pretty large companies in comparison to Teleflex. They are medical devices companies but the products they make are vastly different from what Teleflex manufactures and supplies.

Their paths may cross in future, but, for the time being, Teleflex does not face any considerable threat from them. In fact, Teleflex is more in league with smaller medical devices manufacturers like Bard, Roper Technologies and Merit Medical. 

Is Teleflex Stock A Buy? The Bottom Line

Teleflex is a fast-growing diversified medical devices and instruments provider, active in a fast-growing market. Its products, on a daily basis, are used in more than 31,000 surgical procedures, to provide assistance to more than 6,000 IC patients.

It was a particularly bad year for many medical equipment companies as the global pandemic led to postponement of many elective surgeries. However, Teleflex endured the pandemic pretty well with better-than-expected sequential improvement from quarter to 2 quarters and from quarter 3 to quarter 4.

The stellar performance was led by product lines such as Interventional Urology, Interventional Access and Surgical businesses.

The company continues with its vigorous Merger and Acquisition activities, adding companies that leverage the existing Teleflex call points and are immediately accretive to its revenue growth rates.

The company purchased Z-Medica in a $500 million cash deal in December. With this purchase, Teleflex will add to its kitty hemostatic products, which accelerate the body’s natural clotting ability. Z-Medica is growing into a $600 million addressable market.

The medical company performed above expectations in the fourth-quarter performance as trends continued to improve across many of its product categories and geographies. The company remains optimistic about its future and has reinstated its financial guidance for 2021 as things return to normal. 

All in all, the future prospects look bright, and the company has amply rewarded long-term investors, given the fact that it was just a $50-$60 stock in 2010.

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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.