Mini-conglomerate and Motley Fool Inside Value selection Teleflex
Teleflex has a history of posting moderate organic growth and supplementing internal expansion with bolt-on acquisitions. Yesterday's second-quarter earnings were a bit of anomaly, since growth came primarily from acquisitions, along with currency benefits from a weak dollar. Overall, total sales advanced about 4.5%.
Growth was particularly strong in the medical and aerospace business units. Commercial goods, the third and largest segment, saw a nearly 6% decline in operating profit. It's unfortunately exposed to the struggling automotive industry, which accounts for about half of segment sales. Fortunately, management has decided to "evaluate strategic alternatives" for businesses in the unit.
This is part of an overall strategy to "increase operating margins, reduce cyclicality and position Teleflex for future growth." The medical segment may be Teleflex's best bet to smooth historically volatile results, and it's wasting no time. Last week, it agreed to acquire medical instruments and supplies firm Arrow International
Medical only accounted for a third of second-quarter revenue, but it was the most profitable segment, reporting a 19.1% operating margin. Aerospace is the second most profitable; it saw a near-50% increase in operating profit for the quarter. As you might have guessed, Commercial is the least profitable, and it's also seeing the slowest sales growth. No wonder management is looking to move away from that area.
In the meantime, Teleflex generated solid free cash flow, to which shareholders have grown accustomed; it provides the capital with which to pay dividends, buy back stock, and pursue acquisitions. It's important to keep in mind that the stock is a small cap, with just more than a $3 billion market capitalization. (That's stock price multiplied by shares outstanding, for the uninitiated.)
As a result, results tend to be more volatile, especially compared to giant conglomerates such as 3M
Fool contributor Ryan Fuhrmann has no financial interest in any company mentioned. Feel free to email him with feedback or to discuss any companies mentioned further. The Fool has an ironclad disclosure policy.