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Morningstar | Teleflex Reports in Line Third Quarter, but Full-Year Profitability Outlook Lowered

No-moat Teleflex reported a solid third quarter, but we're not sure it justifies the stock's 10% move higher. While hitting on what we think is the key metric for investors--organic revenue growth--and modestly higher, but low quality, management outlook on earnings is the primary near-term driver of performance, we think investors should take a longer-term view when valuing the firm. The company reported a quarter in line with our expectations, and we plan no meaningful changes to our forecast outside of updating our valuation for the time value of money. Our $187 fair value estimate implies approximately 17 and 13 times our 2019 adjusted earnings and EBITDA forecasts.

Last quarter we were concerned that Teleflex faced an uphill battle to meet management's 5%-5.5% organic growth target due to middling performance through the first half of the year. With core Teleflex organic growth coming in at 4.6% for the quarter, helped by an additional 1% from Vascular Solutions, or VSI, overall organic growth is now measuring near 3.7% on a year-to-date basis. As a result, guidance now appears more attainable although we'd highlight management's commentary suggesting the firm is likely to perform at the low end of this range. With NeoTract set to annualize into the firm's "organic" growth bucket this quarter these nuances may become more difficult to tease out over time, but we're hopeful the performance of these larger platform acquisitions continues to be disclosed.

VSI and NeoTract continue to perform well and constitute meaningful growth engines for the firm. VSI grew nearly 21%, but we'd note the abnormally weak comparable period in 2017, which will be the case again next quarter. On a two-year basis, growth in this business was comparable with the second quarter, although up nicely versus most of 2017 that faced a slowdown as management integrated the company. NeoTract grew nearly 49% and is on pace to meet or beat management's 50% growth target for the full year.

After dissecting what on the surface looks like a $0.07 bump to full-year earnings, it looks like a lower tax rate is masking a few million-dollar reduction to non-GAAP pretax income. Without the tax benefit, we think guidance suggests core earnings are lower by about $0.12 versus management's prior expectation. This looks more or less in line with this quarter's results that would have been slightly shy of consensus had it not been for a lower-than-anticipated tax rate. The weaker core profitability performance is likely attributable to the combined effects of a less pronounced currency tailwind than originally anticipated along with management's reduction in full-year adjusted gross and operating margin guidance of roughly 60 and 30 basis points, respectively. Our forecasts had already been at the low end of these prior ranges, but our GAAP numbers will likely fall as we incorporate higher acquisition related and restructuring expenses than originally thought.