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PG&E Gets Booted From the S&P 500. Meet Its Replacement

By Eric Volkman – Updated Apr 23, 2019 at 5:46PM

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The newest component of the index is a medical device maker that also likes to make deals.

We're still in January, and big utility PG&E (PCG 0.85%) is already one of the stock market's biggest losers of the year. The company's share price has nose-dived by over 50% since the start of 2019, putting it in a doghouse all its own among large-cap stocks. A sudden admission that you face bankruptcy will do that to you.

With its ultra-steep decline in market capitalization, PG&E was kicked out of the S&P 500, the benchmark large-cap stock index -- a major blow to its prestige (as if it didn't have enough problems). Replacing it in the index is a less well-known company called Teleflex (TFX -0.07%). If you haven't heard of it, you're not alone. Here's a primer.

Teleflex worker

Image source: Teleflex

A flexible approach

Teleflex is a manufacturer and distributor of medical devices. It boasts a sprawling catalog of goods that assist in a wide range of needs and procedures. Teleflex's products are sold under eight brand names:

  1. Arrow
  2. Deknatel
  3. Hudson RCI
  4. LMA
  5. Pilling
  6. Rusch
  7. Urolift
  8. Weck

The company has a global presence. Its busiest market is North America, its home turf, which was responsible for just under 40% of total revenue in Q3 2018. But the company's business is spread out around the planet.

Teleflex began life as an engineering company; over time it morphed into a pure-play medical device enterprise through acquisitions and divestments. That wheel-and-deal spirit still pervades the company. In 2018 it made two acquisitions of privately held companies: Essential Medical, manufacturer of a vascular closure device called Manta, and coronary balloon catheter maker QT Vascular. Such acquisitions have provided much of the fuel for Teleflex's growth lately. In Q3, total net revenue rose by $75  million -- or 14% -- on a year-over-year basis. The company said that almost $50 million of that came from purchased assets; much of the rest was due to sales volume increases.

Teleflex typically posts a bottom-line annual profit, and since 2011 it has raised its total revenue nearly every year. In other words, it's been a pretty reliable and steady performer in terms of key fundamentals lately.

One area of concern, however, is its balance sheet. As of the end of Q3 the company had nearly $2.1 billion in long-term debt -- acquisitions are expensive. That $2.1 billion was almost equal to its annual revenue. We've all seen worse debt situations, though, and this one isn't necessarily a deal-breaker. All the same, parties interested in the company should keep a concerned eye on how it develops.

Pivot and grow

Teleflex's slow, steady pivot to a pure-play medical device company seems like a good strategic business choice. The world is getting older; in the company's key U.S. market, for example, the senior citizen demographic is expected to roughly double over the coming 35 years. As people age, they tend to require more medical care, and this means more business for device makers.

Personally, I prefer a business to grow through existing product/service lines rather than acquisitions, as this is less capital- and resource-intensive. For those who don't necessarily feel the same, Teleflex has shown encouraging growth, and appears set for more. The company is guiding for year-over-year adjusted EPS growth of at least 16.7%, and revenue improvement of 13.5%, for the entirety of fiscal 2018.

The 14 analysts tracking the company have figures in that ballpark for both line items. Going forward, those prognosticators are estimating 12% growth in adjusted EPS, and 6% in revenue, for fiscal 2019.

So as far as the profit and loss statement goes, busy Teleflex looks like a company with encouraging prospects. It doesn't appear likely to slam into the wall of bankruptcy like PG&E did, so I'd imagine it'll be an S&P 500 component for a while. If you're not too spooked by the debt situation, it might just be a good addition to your portfolio too.

Check out the latest PG&E and Teleflex earnings call transcripts.

Eric Volkman has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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Stocks Mentioned

PG&E Stock Quote
$15.37 (0.85%) $0.13
Teleflex Stock Quote
$225.54 (-0.07%) $0.17

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