Teledyne Technologies: Imagining Better Days

Summary

  • Teledyne Technologies has seen a very strong 2021, having digested the FLIR deal very well.
  • I like the great performance, and long-term track record of Teledyne's business is a great deal.
  • A recent pullback, while operating momentum appears strong, creates a compelling set-up here.
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Teledyne Microwave Solutions hoofdkantoor in Silicon Valley

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Shares of Teledyne Technologies Incorporated (TDY) have seen a correction in recent weeks, falling from a high of $490 to roughly $390 per share in a time frame of about a month. That in itself marks a big retreat, but recognize that shares actually set their highs in April, resulting in relatively modest year-to-date losses of around 10%, modest if we compare this to the wider market and certainly some technology and other richly valued stocks.

Teledyne is a fascinating stock to watch, as the company is very well run and has built up a solid track record as a serial acquirer, creating great shareholder value in the process with the passage of time. I covered the name about a year ago in this article, looking at the potential after the company has just announced a mega $8 billion deal for FLIR Systems at the time.

Former Take

Teledyne is a technological conglomerate, focusing on activities which relate to sensing, gathering, transmission and analysis of information, either digital or physical. This diversified approach means that the company is very well diversified between technologies, sectors, and geographic regions, with the business being strong in instrumentation and digit imaging. The R&D powerhouse has been a driver behind the growth, yet the company has made numerous (often bolt-on) deals to further grow the footprint of the business, as this was just a $600 million business in the year 2000.

Early in 2021, the company saw quite some events, which included an $8 billion deal to acquire FLIR. That was a huge deal, as 38 million shares traded around $400 at the time, resulting in a roughly $15 billion equity valuation, or enterprise valuation at the time, implying that FLIR was valued at just over a third of the pro forma valuation, after Teledyne offered a 40% premium for the business.

FLIR was set to add 100% digital imaging sales of $1.9 billion to Teledyne's $3.1 billion revenue base, resulting in a $5 billion revenue base for a pro forma business valued at $23 billion, now comprised out of roughly 50% of digital imaging activities. This ranges from gamma to X-ray, ultraviolet, visible, infrared, microwave and radio wavelength, thereby covering the entire spectrum.

Teledyne traded at around 37 times earnings this time last year and while synergies should drive some improvements in the earnings per share, and thus reduce earnings multiples, valuations were quite demanding to say the least. I believed that the deal could result in accretion, to thereby boost earnings to roughly $13 per share with leverage being very high, as that combination made me very cautious at $400, despite the great long-term track record.

What Happened?

2021 has been quite an uneventful year, at least for the stock, with shares largely rangebound in a relatively tight range between $400 and $450 per share. Shares rallied to nearly $500 a couple of weeks ago, but now have sold off below the $400 mark amidst a correction in broader markets.

In May of last year, the company already had closed the deal for FLIR, a couple of weeks after posting its first quarter results. These results were comforting, as the company hiked the full year 2021 guidance by seventy-five cents, to $12.00-$12.20 in adjusted earnings per share, that is, even excluding FLIR. Following closing of the deal, the company hiked the full year guidance to $15.00-$15.25 per share, which is, of course including FLIR, an outlook which is far stronger than I had hoped for.

The company kept hiking the guidance alongside the third quarter earnings report, and in January of this year reported its full year results for 2021. Full year sales rose 49%, to $4.6 billion, but that is meaningless with the FLIR deal taking place in the year. Adjusted earnings came in as high at $16.86 per year. Furthermore, the company guided for stabilization on this earnings front, with earnings seen between $17.60 and $18.00 per share in 2022.

Further, also promising was that leverage fell from a 4 times on a pro forma basis when the FLIR deal was announced, to just 2.9 times. The adjustments from GAAP earnings to adjusted earnings look quite fair, at least no stock-based compensation expenses are adjusted for.

The solid results continued in the first quarter of 2022, as the company narrowed and hiked the full year earnings guidance to $17.75 and $18.00 per share, all while leverage has come down further. It has come down to a point where almost additional M&A could be expected, or perhaps some buybacks could be executed upon following the dilution that incurred with the FLIR deal a year ago, the stock having seen significant valuation multiple compression.

And Now?

The truth is that Teledyne shares are trading flattish year-over-year, actually outperforming the market a tiny bit. This is comforting, driven by the very strong operating performance, with earnings power coming in stronger than I estimated this time last year upon the FLIR deal announcement.

Given all of this, we have seen very meaningful valuation compression, from about 36 times earnings to 22 times earnings, while leverage has fallen from roughly 4 times to 2.8 times at the moment. Momentum is furthermore solid, with a half a billion-dollar recent contract award being a testament of that.

Given where we are in the wider markets and interest rate environment, an overvalued stock has been priced much more reasonably in my eyes. While the valuation here looks relatively fair, providing a long-term entry opportunity, I do recognize that more names have sold off (more) aggressively.

This still makes me cautious to commit capital, although we are rapidly getting to interesting levels here.

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This article was written by

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The writer is a long term value investor and M.Sc graduate in Financial Markets with over 10 years experience. Value can be found in both long and short ideas and uses options to enhance the risk-return profile of investment ideas. Disclaimer: This article provides opinions and information, but does not contain recommendations or personal investment advice to any specific person for any particular purpose. Do your own research or obtain suitable personal advice.
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Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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