Teleflex Stock Looks Fully Valued At $370

November 24th, 2020 by Trefis Team
TFX: Teleflex logo
TFX
Teleflex

After a 65% rise since the March 23 lows of this year, at the current price of around $370 per share we believe Teleflex stock (NYSE: TFX), best known for its single-use medical devices for common diagnostic and therapeutic procedures, has reached its near-term potential. TFX stock has rallied from $225 to $370 off the recent bottom compared to the S&P which moved 59% over the same period, with the resumption of economic activities as lockdowns are gradually lifted. TFX stock is also up 49% from levels of $250 seen in early 2018, two years ago.

Some of the 49% rise of the last 2 years is justified by the roughly 21% growth seen in Teleflex’s revenues from 2017 to 2019. Also, the company saw a 3% growth in total shares outstanding, resulting in a 18% growth in revenue per share (RPS) to $56.18 in 2019, compared to $47.69 in 2017. With the growth in RPS, the company’s P/S (price-to-sales) ratio also expanded. We believe the stock is likely to see downside after the recent uptick and the potential weakness from a recession-driven by the Covid outbreak. Our dashboard, ‘What Factors Drove 49% Change in Teleflex Stock between 2017 and now?, has the underlying numbers.

Teleflex’s P/S multiple changed from 5.2x in 2017 to 6.7x in 2019. While the company’s P/S is 6.6x now, there is a potential downside risk when the current P/S is compared to levels seen in the past years, P/S of around 5x at the end of 2017 and 2018.

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So what’s the likely trigger and timing for downside?

The global spread of Coronavirus has meant lower demand for Teleflex’s products primarily for interventional and surgical uses, given these products are utilized for elective procedures, which have seen a significant decline in 2020 owing to the pandemic. That said, the company reported better than expected Q3, led by higher demand for respiratory and vascular products in the current pandemic. Total revenue was down 3.1% y-o-y to $628 million, while the adjusted earnings of $2.77 per share reflect a 6.7% decline over the $2.97 figure reported in the prior year quarter. Total revenue also benefited from the company’s last year acquisition of IWG High Performance Conductors. The mismatch between revenue and earnings decline can be attributed to a 140 bps decline in gross margins during the quarter. This margins were impacted due to lower sales and higher manufacturing costs. Looking forward, with economies opening up gradually and growth in number of elective procedures performed, the demand for Teleflex’s products is expected to rise. The company’s recently announced acquisition of Z-Medica, a company specializing in bleeding control solutions, is also expected to bolster the margin growth over the coming years. That said, much of these factors appear to be priced in the current stock value of $370, despite the expected recovery in demand post Covid. In reality, 2020 full year revenues are estimated to be down 3% to $2.5 billion while earnings are expected to be down 6% to $10.50.

The actual recovery and its timing hinge on the broader containment of the coronavirus spread. Our dashboard Trends In U.S. Covid-19 Cases provides an overview of how the pandemic has been spreading in the U.S. and contrasts with trends in Brazil and Russia. Following the Fed stimulus — which set a floor on fear — the market has been willing to “look through” the current weak period and take a longer-term view. With investors focusing their attention on 2021 results, the valuations become important in finding value. Though market sentiment can be fickle, and evidence of an uptick in new cases could spook investors once again. At levels of around $370, TFX stock is trading at 6.9x its 2020 expected RPS of $53.95, and 6.0x its 2021 expected RPS of $61.25. This compares with P/S of 5.2x seen in 2017 and 4.8x seen in late 2018, making the stock appear vulnerable to downside risk.

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