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Teleflex Incorporated: Successful Transition into Pure-Play Medical Device Manufacturer

November 19, 2012 | About:
Teleflex Incorporated (TFX) is a leading global provider of specialty medical devices for a range of procedures in critical care and surgery. It provides solutions that enable healthcare providers to improve outcomes and enhance patient and provider safety. Headquartered in Limerick, Pa., Teleflex employs approximately 11,100 people worldwide and serves healthcare providers in more than 130 countries.

Valuation

TFX is currently trading at 1.58x P/B, a 11% premium over its five-year average P/B of 1.42x. Its previous historical valuation lows were 1.11x and 1.13x in March 2009 and September 2011, respectively. TFX has achieved a five-year book value per share CAGR and 10-year book value per share CAGR of 9.7% and 9.3%, respectively.

Financial And Business Risks

TFX is moderately geared with a gross debt-to-equity ratio of 55% and a net gearing of 20%. This is partly mitigated by an interest coverage ratio of 2.6 and a current ratio of 5.2.

The Healthcare Reform Act establishes a 2.3% deductible excise tax on sales of medical devices with respect to any entity that manufactures or imports certain medical devices offered for sale in the U.S., beginning in 2013. TFX currently estimates the impact of the 2.3% deductible excise tax to be approximately $15 million (4.6% of fiscal year 2011 net income) annually, beginning in 2013.

In the U.S., before TFX can market a new medical device, or a new use of, or claim for, or significant modification to, an existing product, TFX must first receive either 510(k) clearance or approval of a premarket approval, or PMA, application from the FDA, unless an exemption applies. The FDA is currently reviewing its 510(k) clearance process, and may make the process more rigorous, which could require TFX to generate additional clinical or other data, and expend more time and effort, in obtaining future 510(k) product clearance.

TFX operates 23 manufacturing sites, with major manufacturing operations located in the Czech Republic, Malaysia, Mexico and the U.S. Many of its key products are manufactured at single locations, and the availability of alternate facilities is limited.

TFX is not dependent on any single supplier for a substantial amount of the materials used or components supplied for its overall operations. Materials used in the manufacture of products such as steel and plastic resins are purchased from a large number of suppliers in diverse geographic locations.

Business Quality and Capital Allocation

TFX has focused on transitioning into a pure-play medical technology company through an extensive acquisition and divestiture program over the past few years. TFX was founded in 1943 as a manufacturer of precision mechanical push/pull controls for military aircraft. It has significantly changed the composition of its portfolio of businesses, expanding its presence in the medical technology industry, while divesting all of its other businesses serving the aerospace and commercial markets. The most significant of these transactions occurred in 2007 with its acquisition of ARROW International, a leading global supplier of catheter-based medical technology products used for vascular access and cardiac care.

TFX's long-term profitability objectives include targets of gross margins of 55%, operating margins of 25% and ROEs of 15%. Since 2007, TFX has seen its current gross margins and operating margins grow to 47% and 15%, respectively, from 2007 gross margins of 35% and operating margins of 10%.

On Oct. 23, 2012, TFX acquired substantially all of the assets of Singapore-listed LMA International N.V., a global provider of laryngeal masks with a portfolio of innovative products used extensively in anesthesia and emergency care for a cash consideration of $292.2 million. This acquisition strengthens TFX's existing anesthesia franchise and provides access to key clinical U.S. and international call points.

TFX has paid a dividend for every single year since 1995 and its current dividend yield is 2.0%. Consistent quarterly dividends of $0.34 have been paid every quarter since May 2008.

Conclusion

While there is upside to TFX's current valuations, a lot is dependent on the success of integrating new acquisitions and healthcare regulations. Dividend yield of 2% hardly provides any cushion. I will wait for a better entry price.

Disclosure

The author does not have a position in any of the stocks mentioned.

About the author:

Mark Lin
Mark is a private value investor and runs the Cheapskate Investing website which borrows from the wisdom of value investing giants, using a systematic quantitative screening approach to filter the global stock markets for cheap deep-value cigar-butts and wide-moat compounders. He is also a regular contributor to various value investing communities.

Visit Mark Lin's Website


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