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Teleflex: High Upside Potential This Year

March 27, 2012 | About:
Teleflex (NYSE:TFX) generally calls itself a diversified company since it runs several different types of businesses. Its focus is not only on medical. It is today a very important company to watch. Since last year it has been undergoing significant changes at least from a management and M&A standpoint. The company named a new CFO in March 2012 and it made two acquisitions in 2011. This article explains how this transformation may positively affect investors’ returns.

The stock currently trades around $61. After a big peak between January and August 2011 (around $64), the stock went down to $50 and recovered to reach present levels. Shares yield at 2.20%. The very question for investors is whether the stock still has the potential to rise or not. March stock target value was $60. This figure has already been reached. I believe the stock might go $5 to 10 up by 2013. The first reason is the arrival of the new CFO who will no doubt tackle the potential financial issues of the company in order to increase earnings, thus resulting in higher EPS. To me the fact that he re-affirmed the company’s 2012 guidance shows that he is committed to making the company more profitable despite analysts’ lower EPS forecast. What I like about Mr Powell, is that he has been in the company for one year already and knows medical device and healthcare.

Teleflex is also currently making a structural shift towards healthcare (medical device), an industry made of high value and high margin products. It is definitely a lucrative sector.

The company acquired Vasanova for $ 55 million in January 2011, which enabled it to enter the catheter tip positioning business and expand its product portfolio. Based in Menlo Park, in the San Francisco Bay area the company possesses a unique technology allowing an optimal placement of the catheter tip. This is a very sensitive arena in the industry given the potential safety issues that occurred in the past when placing a catheter. In early March 2012 it announced that the technology got approval from the US FDA.

This will give Teleflex an enormous boost given the novelty of this product and Vasanova’s market leading position. Boston Scientific is the only other important company on this market and it does not have the same level of device sophistication as Vasanova. This type of products is expensive and has been awaited in the healthcare market for a long time. Safety is the number one issue for catheter tip positioning and the company now brings a reliable solution. Therefore commercialization should go fast and quickly impact 2012 revenue.

At the same time it sold its aerospace business to AARCorporation for $280 million, which added to its cash flow but is also the concrete sign of the strategic move I mentioned above. The firm’s major competitors are Covidien, Carefusion and CR Bard. With $ 1.9 billion in sales it is smaller than those competitors, the biggest being Covidien close to $12 billion in revenue.

Covidien appears as a serious competitor for Teleflex and not just because of its size. The company is making some important strategic moves, which are similar to Teleflex’s. It recently announced that it will spin off its pharmaceutical unit, enabling it to focus on medical devices and increase profitability. Teleflex as I stated before pursues the same goals. Therefore competition will be fierce between the two companies, which are taking steps to focus on the most profitable business segments and eventually divest non-profitable business units. I still believe that Teleflex is more advanced in this move since it successfully got its aerospace purchased whereas Covidien did not manage to do the same with its drug business. For investors this is good news, which could result in very positive changes in EPS translating into higher dividend yields and returns.

I strongly believe that through its acquisitions and the sale of some business units Teleflex is going to focus on expanding its market with high margin products, which will help improve earnings and profitability. Some also say the company might be doing some clean-up to merge with Covidien in the future, which is a likely scenario. I strongly recommend buying the stock today because the addition of high margin innovative products is likely to increase the EPS. It is one of the highest in the industry (around $5) already. Teleflex's P/E is lower than the industry average (10 versus 16). This shows that there is a lot of room for the stock to rise much higher and generate significant returns. I recommend buying this stock given the firm’s market potential.

If you have Teleflex stock, then keep it. I do believe the dividend yield will increase as earnings grow: Teleflex is likely to reinforce a strategy of keeping its current shareholders. An increase in the dividend yield might also attract new shareholders while avoiding quick stock sales, therefore decreasing volatility.

In any case, Teleflex is on the rise this year and savvy investors should pay attention to that.

About the author:

I'm mostly interested in income investing using dividends, preferred stocks and other debt instruments, and pair trading.

I fundamentally analyze every business from the top down.

In my personal life, I have a strong Jewish faith and enjoy playing Scrabble and entrepreneurship.

Visit StockCroc's Website

Rating: 4.3/5 (8 votes)


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