Teleflex (NYSE:TFX) operates in three primary business segments: medical, aerospace and commercial. On Wednesday it announced 2008 results that saw revenue grow to $2.4 billion, primarily due to an acquisition that brought timely exposure to the stable medical industry. Its market capitalization also hovers around $2 billion, placing the company firmly in the mid-cap category - conditions that make it significantly smaller than many of its competitors. But this hasn't stopped Teleflex from outperforming its diversified industrial peers.
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At the end of 2007, Teleflex embarked on an acquisition and divestiture strategy that significantly increased "sales to medical device manufacturers and disposable products sold for critical care applications", while reducing reliance on the more cyclical commercial segment. The specific moves were a $2 billion acquisition of erstwhile publicly-traded Arrow International and its medical technology businesses in October 2007 and the subsequent December sale of its automotive and related industrial businesses.
As a result, medical sales accounted for 62% of 2008 sales and grew 44% to $1.5 billion. Operating margins came in at an impressive 19% of divisional sales. Aerospace sales improved 13% to $511 million, to account for 21% of total sales, as operating margins improved to 12%. Commercial sales, however, dropped 7% to $411 million and reported operating margins totaled 7% and accounted for only 17% of total sales. (Find out how to put this important component of equity analysis to work for you in Analyzing Operating Margins.)
Restructuring charges and higher interest expense from debt taken on to fund the Arrow acquisition contributed to the reduction in full-year net income of 18% to just under $120 million, or $3.03 per share. Management estimated that earnings totaled $4.05 per diluted share, excluding one-time restructuring charges.
Teleflex management is calling for 2009 diluted earnings of $4.10 to $4.40, exclusive of any items it considers non-recurring. This places the forward P/E ratio at a reasonable 11.6 times earnings, but does not fully take into account Teleflex's capital generating capabilities, as free cash flow tends to exceed reported net income by a fair margin. For 2008, free cash flow totaled approximately $3.67 and was reduced by a sizable tax payment on gains from the sale of its commercial businesses last year. As a result, management expects operating cash to grow to $290 million in 2009, which, if CAPEX levels remain similar to 2008, could push free cash flow to close to $6 per share. (To learn more about cash metrics, be sure to check out our Cash Flow Indicator Ratios Tutorial.)
Over the past year, Teleflex has handily outperformed the market (as measured by the S&P 500) and its larger peers, including Honeywell (NYSE:HON), Danaher (NYSE:DHR), Raytheon (NYSE:RTN) and United Technologies (NYSE:UTX). Direct comparability is up for debate, however, as these firms have widely varying product mixes and geographic diversification. Raytheon, for example, is heavily involved in aerospace for defense markets, while Danaher dabbles in everything from medical technologies to tools and components. All are trading at low multiples of earnings given exposure to cyclical end markets, but Teleflex continues to stand out for near-perfect timing in shifting from businesses dependent on the unpredictable business cycle.