Morningstar | Teleflex Continues to Meet Lofty Expectations
The Teleflex story is one of constant change, from the firm’s 1943 founding as a manufacturer of components for WWII aircraft to the final divestment of its industrial businesses in 2011, and full transition into medical devices thereafter. Under the leadership of former CEO Benson Smith, the company completed its transition from industrial conglomerate to pure-play medical device manufacturer, with the core business focusing on vascular, surgery, and anesthesia end markets. The firm’s strategy has been effective in carving out niche markets in which to compete, and thus far has remained relatively insulated from intense competition with the largest players in medtech. Management has targeted market opportunities where the company can supply disposable products for mandatory procedures, which create relatively stable demand and associated cash flows. Additionally, the product portfolio primarily contains low dollar value items that, along with incremental innovation, has allowed the company to improve its margin profile through modest price inflation over time. In combination with like-for-like pricing power, Smith has characterized direct market access as a core tenant of the company’s strategy, which has led Teleflex to slowly acquire its foreign distribution partners. This provides better line of sight to its end markets and allows the firm to capture otherwise lost distributor margin, leading to sustained and predictable gross margin expansion.While Smith retired at the end of 2017, we anticipate the strategy likely remain unchanged under new CEO (and former COO) Liam Kelly. The recent acquisitions of Vascular Solutions and NeoTract will help improve the firm’s margin profile, but we believe the high prices paid will limit contribution to ROIC over the near term. Additionally, the growing goodwill component of the firm’s invested capital base has held historical returns below its weighted average cost of capital, and we’d like to see further evidence of the company trending toward sustainable economic profit generation before awarding a moat.Teleflex is a provider of medical technology products. The company primarily designs, develops, manufactures and supplies single-use medical devices used by hospitals and healthcare providers for common diagnostic and therapeutic procedures in critical care and surgical applications. The company's product categories within its geographic segments include vascular access, which provides devices that facilitate a variety of critical care therapies and other applications; anesthesia, which comprised of airway and pain management product lines; and interventional, which consist of a variety of coronary catheters, structural heart therapies, and peripheral intervention products.
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