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Applied Portfolio Management Analysts: Zhiqiang Lu and Scott Wells Report Date: 5/12/2014 Market Cap (mm) $6,730 Annual Dividend $0.84 2Yr Beta (S&P 500 Index) 0.81 Return on Capital 19.0% Dividend Yield 1.8% Annualized Alpha 10.4% Compared With: EPS (ttm) $2.28 Price/Earnings (ttm) 20.6 Institutional Ownership 14.4% Edwards Lifesciences Corp. Current Price $47.08 Economic ValueAdded (ttm) $181 Short Interest (% of Shares) 25.3% Teleflex Incorporated 12mo. Target Price $48.50 Free Cash Flow Margin 21.9% Days to Cover Short 30.9 and the S&P 500 Index Business Description Total Revenue 11.5% Free Cash Flow 53.3% EBIT 16.0% Total Invested Capital 11.0% NOPAT 19.5% Total Assets 10.8% Earnings Per Share 19.5% Economic ValueAdded 27.0% Dividends Per Share N/A Market ValueAdded 9.1% 2009 2010 2011 2012 2013 21.0% 22.3% 21.7% 21.5% 25.1% 13.4% 11.6% 16.9% 23.5% 21.9% 3.7% 3.6% 5.9% 4.2% 4.6% 0.0% 0.0% 0.0% 0.0% 1.4% 2009 2010 2011 2012 2013 0.97 1.26 1.49 1.75 2.15 0.00 0.00 0.00 0.00 0.68 0.93 1.18 1.32 1.55 2.12 0.13 0.46 (1.14) 1.54 1.76 Datasource: Capital IQ Margins and Yields Operating Margin Per Share Metrics Earnings NOPAT Free Cash Flow Dividends Free Cash Flow Margin Earnings Yield Dividend Yield ResMed Inc., through its subsidiaries, engages in the development, manufacture, and distribution of medical equipment for treating, diagnosing, and managing sleepdisordered breathing and other respiratory disorders. It offers various products, including airflow generators, diagnostic products, mask systems, headgear products, and ventilation devices for the treatment of sleepdisordered breathing that includes obstructive sleep apnea and other respiratory disorders, as well as other optional accessories, such as cold passover humidifiers, carry bags, and breathing circuits. The company also Investment Thesis ANNUALIZED 3YEAR CAGR ResMed (RMD) is a leading developer, manufacturer and distributor of medical equipment for treating sleepdisordered breathing (SDB) and other respiratory disorders. RMD operates in an industry that is expected to achieve robust growth in the coming years and is well positioned as an industry leader to take advantage of this expected growth in the U.S. and abroad. Total revenues, EBIT and NOPAT have all shown steady increases since 2008. ResMed has generated strong free cash flows from last two years, with a superb ROIC of 19% and with a corresponding WACC of 7.7% for 2013. Using conservative forecasting assumptions, ResMed is currently undervalued in the market, based on the present value of FCF. ResMed Inc. Sector: Healthcare BUY RMD 5% 0% 5% 10% 15% 20% 25% 30% RMD ^SPX 30% 20% 10% 0% 10% 20% 30% 40% RMD EW TFX 0 10 20 30 40 50 60 2008 2009 2010 2011 2012 2013 Price/Earnings Price/Free Cash Flow $0 $50 $100 $150 $200 $250 $300 $350 $400 2008 2009 2010 2011 2012 2013 EBIT Net Operating Profit After Tax $0 $1,000 $2,000 $3,000 $4,000 $5,000 $6,000 $0 $50 $100 $150 $200 2008 2009 2010 2011 2012 2013 Economic ValueAdded Market ValuedAdded 0% 5% 10% 15% 20% 25% 2008 2009 2010 2011 2012 2013 ROA ROE ROIC
Transcript
Page 1: Sector: Healthcare BUY · Current Price $47.08 Economic Value‐Added (ttm) $181 Short Interest (% of Shares) 25.3% Teleflex Incorporated 12‐mo. Target Price $48.50 Free Cash Flow

AppliedPortfolioManagement Analysts:ZhiqiangLuandScottWells

Report Date: 5/12/2014

Market Cap (mm) $6,730 Annual Dividend $0.84 2‐Yr Beta (S&P 500 Index) 0.81

Return on Capital 19.0% Dividend Yield 1.8% Annualized Alpha 10.4% Compared With:

EPS (ttm) $2.28 Price/Earnings (ttm) 20.6 Institutional Ownership 14.4% Edwards Lifesciences Corp.

Current Price $47.08 Economic Value‐Added (ttm) $181 Short Interest (% of Shares) 25.3% Teleflex Incorporated

12‐mo. Target Price $48.50 Free Cash Flow Margin 21.9% Days to Cover Short 30.9 and the S&P 500 Index

Business Description

Total Revenue 11.5% Free Cash Flow 53.3%

EBIT 16.0% Total Invested Capital 11.0%

NOPAT 19.5% Total Assets 10.8%

Earnings Per Share 19.5% Economic Value‐Added 27.0%

Dividends Per Share N/A Market Value‐Added 9.1%

2009 2010 2011 2012 2013

21.0% 22.3% 21.7% 21.5% 25.1%

13.4% 11.6% 16.9% 23.5% 21.9%

3.7% 3.6% 5.9% 4.2% 4.6%0.0% 0.0% 0.0% 0.0% 1.4%

2009 2010 2011 2012 2013

0.97 1.26 1.49 1.75 2.15

0.00 0.00 0.00 0.00 0.68

0.93 1.18 1.32 1.55 2.120.13 0.46 (1.14) 1.54 1.76

Datasource: Capital IQ

Margins and Yields

Operating Margin

Per Share Metrics

Earnings

NOPATFree Cash Flow

Dividends

Free Cash Flow Margin

Earnings YieldDividend Yield

ResMed Inc., through its subsidiaries, engages in the development, 

manufacture, and distribution of medical equipment for treating, 

diagnosing, and managing sleep‐disordered breathing and other 

respiratory disorders. It offers various products, including airflow 

generators, diagnostic products, mask systems, headgear products, 

and ventilation devices for the treatment of sleep‐disordered 

breathing that includes obstructive sleep apnea and other respiratory 

disorders, as well as other optional accessories, such as cold passover 

humidifiers, carry bags, and breathing circuits. The company also 

Investment Thesis

ANNUALIZED 3‐YEAR CAGR

ResMed (RMD) is a leading developer, manufacturer and distributor of 

medical equipment for treating sleep‐disordered breathing (SDB) and 

other respiratory disorders. RMD operates in an industry that is 

expected to achieve robust growth in the coming years and is well 

positioned as an industry leader to take advantage of this expected 

growth in the U.S. and abroad. Total revenues, EBIT and NOPAT have 

all shown steady increases since 2008.  ResMed has generated strong 

free cash flows from last two years, with a superb ROIC of 19% and 

with a corresponding WACC of 7.7% for 2013.  Using  conservative 

forecasting assumptions, ResMed is currently under‐valued in the 

market, based on the present value of FCF. 

ResMed Inc. Sector: Healthcare BUYRMD

‐5%

0%

5%

10%

15%

20%

25%

30%RMD ^SPX

‐30%

‐20%

‐10%

0%

10%

20%

30%

40%RMD EW TFX

0

10

20

30

40

50

60

2008 2009 2010 2011 2012 2013

Price/Earnings Price/Free Cash Flow

$0

$50

$100

$150

$200

$250

$300

$350

$400

2008 2009 2010 2011 2012 2013

EBIT Net Operating Profit After Tax

$0

$1,000

$2,000

$3,000

$4,000

$5,000

$6,000

$0

$50

$100

$150

$200

2008 2009 2010 2011 2012 2013

Economic Value‐Added Market Valued‐Added

0%

5%

10%

15%

20%

25%

2008 2009 2010 2011 2012 2013

ROA ROE ROIC

Page 2: Sector: Healthcare BUY · Current Price $47.08 Economic Value‐Added (ttm) $181 Short Interest (% of Shares) 25.3% Teleflex Incorporated 12‐mo. Target Price $48.50 Free Cash Flow

NYSE: RMD

Analysts: Zhiqiang Lu and Scott Wells Student Investment Fund Portfolio

Business Description

ResMed (RMD) is a leading developer, manufacturer and distributor of medical

equipment for treating, diagnosing, and managing sleep-disordered breathing (SDB)

and other respiratory disorders. Sleep-disordered breathing is most commonly

associated with obstructive sleep apnea (OSA). Since forming in 1989, RMD has

revolutionized the treatment of OSA and SDB through the development of CPAP,

airflow generators, diagnostic products, mask systems, headgear and other

accessories. RMD’s growth has been fuelled by global expansion, increased

awareness of respiratory conditions as a significant health concern among physicians

and patients, and research and product development efforts.

Recommendation: BUY Market Cap: $7 billion Current Price: $49.75

Sector: Health Care Dividend Yield: 2.0% 12-month target price: $48.50

Sub-Sector: Equipment P/E Ratio: 21.83 Beta: 0.73

Highlights

RMD is well positioned as

an industry leader to take

advantage of expected

sector growth in the U.S.

and abroad.

RMD’s total revenue, EBIT

and NOPAT have steadily

increased over the last 5

years.

Since 2008, RMD has

steadily increased EVA and

MVA.

Using conservative

forecasts, RMD expected to

generate a value spread in

excess of 7.5%.

At a current price of $49.75

and an intrinsic value of

$56.28, RMD is undervalued

by approximately 11.6%.

Investment Thesis

ResMed is a leading developer, manufacturer and distributor of medical equipment for treating sleep-disordered

breathing (SDB) and other respiratory disorders. RMD operates in an industry that is expected to achieve robust

growth in the coming years and is well positioned as an industry leader to take advantage of this expected growth in

the U.S. and abroad. ResMed has generated strong free cash flows from last two years, with a superb ROIC of 19%

and with a corresponding WACC of 7.7% for 2013. Using a conservative forecasting approach, ResMed is currently

under-valued in the market, based on the present value of FCF.

Page 3: Sector: Healthcare BUY · Current Price $47.08 Economic Value‐Added (ttm) $181 Short Interest (% of Shares) 25.3% Teleflex Incorporated 12‐mo. Target Price $48.50 Free Cash Flow

NYSE: RMD

Macroeconomic Outlook

Our February review of the 21 Conference Board

Economic Indicators, leads us to believe that the

economic expansion will pick up steam in 2014.

Strong leading indicators such as new

manufacturing orders, nominal and real durable

goods orders, and the S&P 500 index all point to

increasing economic activity and optimism for the

future. Additionally, initial unemployment claims

have fallen to near their pre-recession levels as the

economy continues to recover and put people back

to work. For the all-important first quarter of the year, distinctly risk-off sectors provided highest

returns best returns as measured by SPDR sector ETF’s. Health Care was a particularly strong sector for

Q1 generating total returns of 6.1%. While the advance estimate of GDP for the first quarter of 2014

was disappointing indicating a rise of only 0.1%, we remain confident in our forecast for the remainder

of the year.

Industry Outlook

RMD operates in an industry that is expected to achieve robust growth in the coming years. This growth

is attributable to increased public awareness SDB and its relationship with other serious health disorders

such as type 2 diabetes and congestive heart failure. A 2013 study estimates that 26% of adults

between the ages of 30 and 70 have some form of OSA. This represents approximately 46 million

people in the United States. Industry experts believe that the global respiratory devices market could

grow to $7.1 billion by 2017 which would be a compound annual growth rate (CAGR) of 7%. The U.S.

market is expected to reach $4 billion by 2017, an 8% CAGR.

RMD is well positioned as an industry leader to take

advantage of this expected growth in the U.S. and abroad.

RMD markets its products in approximately 100 countries

with sales outside of North and Latin America representing

approximately 44% of their 2013 revenues. In a recent Q3

2014 earnings call, RMD announced that revenue from

outside the Americas had grown 6% on a constant currency

basis from the prior year.

2013 Revenues by Geographic Segment

Page 4: Sector: Healthcare BUY · Current Price $47.08 Economic Value‐Added (ttm) $181 Short Interest (% of Shares) 25.3% Teleflex Incorporated 12‐mo. Target Price $48.50 Free Cash Flow

NYSE: RMD

Historical Analysis

3YR Compound Average Growth Rates

Analyzing the three year CAGRs shows that RMD’s total revenue, EBIT, and NOPAT have all experienced

superior growth in excess of 10%. We also see that RMD’s EPS grows even faster than revenues or EBIT,

which indicates the firm gains additional efficiencies in the interest and tax sections of the income

statement. EVA and MVA also show strong growth. In 2013, RMD began to distribute profits to

shareholders in the form of a cash dividend equal to $0.68 per share. Total invested capital and total

assets have experienced almost equal CAGR’s, indicating much of the growth in assets is attributed to

property, plant, and equipment and other components of invested capital. FCF expands very fast at a

growth rate of 53.3%, which shows solid fundamentals.

Performance Analysis

Total Revenue and Net Income: RMD has shown

steadily increasing revenues each year, including

those years attributed to the “great recession”.

Top-line revenue growth that is increasing means

the reservoirs of gross cash from which accounting

and economic profits are created are also

increasing.

Page 5: Sector: Healthcare BUY · Current Price $47.08 Economic Value‐Added (ttm) $181 Short Interest (% of Shares) 25.3% Teleflex Incorporated 12‐mo. Target Price $48.50 Free Cash Flow

NYSE: RMD

EBIT and NOPAT: RMD’s EBIT and NOPAT have also

increased each year since 2008. This shows that the

increasing revenues RMD has enjoyed have passed

through the income statement and resulted in increased

operating profits.

Free Cash Flows: As RMD has increased its NOPAT, free cash flows have also generally trended

upwards. The one exception is 2011 when NOPAT increased from 2010, but free cash flows suffered a

substantial drop and were negative for the year. This is attributed to both a small increase in net fixed

assets along with a substantial increase in working capital for the year.

Profitability: ROA, ROE and ROIC have all been

trending upwards since 2011. While all three

measures suffered a small decline in 2011, the

brief drop can be explained due to a sharp

increase in total invested capital in 2011. Such an

increase is a strong sign of asset expansion as net

fixed assets also increased that year.

Page 6: Sector: Healthcare BUY · Current Price $47.08 Economic Value‐Added (ttm) $181 Short Interest (% of Shares) 25.3% Teleflex Incorporated 12‐mo. Target Price $48.50 Free Cash Flow

NYSE: RMD

Key Forecasting and Modeling Assumptions

The valuation of RMD was performed using modeling consumptions that were conservative in order to

remain consistent with the outlook of the portfolio. A number of approaches are available to estimate

the intrinsic value of a company. One such approach, known as the dividend discount model, involves

forecasting the future dividends of the firm and then discounting them back to the present value.

Because RMD has only just begun to distribute a cash dividend since 2013, not enough information was

available to provide a reliable forecast of future dividends. As such, a discounted free cash flow model

was used to estimate the RMD’s intrinsic value. At a current price of $49.75 and a per share intrinsic

value of $56.28, RMD is undervalued by 11.6%. The modeling assumptions and intrinsic value estimates

are further explained below.

Income Statement Inputs

Revenue Growth: Revenue growth from 2009 has consistently remained above 10% reaching a high of

18.6% in 2010. This results in a 5 year average of 12.6% from 2009 through 2013. In July of 2013,

Medicare and Medicaid Services instituted a second round of reimbursement cuts for CPAP devices,

masks and accessories. This second round of cuts resulted in a 47% reimbursement reduction. The

revenue forecast for 2014 is for a 4.4% increase while RMD works to absorb these reimbursement

reductions. The growth rate was then increased back up to 7% in 2015, which remains well below the 5

year average. Revenues were then tapered down to a long-term rate of 3.5% in 2018 and beyond.

Year 2014E 2015E 2016E 2017E 2018E

Revenue Growth 4.4% 7.0% 6.0% 5.0% 3.5%

Gross Margin: From 2009 through 2013, RMD’s gross margin remained stable around an average of

60.4%. Analysts at S&P’s Capital IQ reported that gross margins were expected to expand in 2014 due to

improved manufacturing and a more profitable sales mix. To remain conservative, a small expansion of

gross margin to 61% was used in the forecasts.

Operating Margin: From 2009 through 2012, RMD’s operating margin remained relatively stable and

fluctuated around an average of 21.6%. 2013 saw an expansion of this margin to 25.1%, which then

raised the overall 5 year average to 22.3%. Because operating margin feeds directly into EBIT and

NOPAT, and ultimately then into free cash flows, the forecasts made here will have a dramatic effect on

the final intrinsic value of the firm. In order to remain conservative in the final intrinsic value estimates,

Page 7: Sector: Healthcare BUY · Current Price $47.08 Economic Value‐Added (ttm) $181 Short Interest (% of Shares) 25.3% Teleflex Incorporated 12‐mo. Target Price $48.50 Free Cash Flow

NYSE: RMD

an operating margin of 21% was used in all forecasted years. The 21% margin represents the lowest

such margin RMD has achieved since 2009 and we believe is an appropriately conservative estimate

going forward.

Net Margin: Net margins from the previous 5 years expanded moderately from 15.9% in 2009 to 20.3%

in 2013. This resulted in a 5 year average of 18.1%. To account for Medicare and Medicaid

reimbursement cuts in 2013, the net margin in 2014 was forecasted to drop to 17.4%. For 2015 and all

remaining years, the average of 18.1% was used.

Common Shares Growth: In February of this year, RMD’s board of directors authorized a new share

repurchasing program allowing the company to acquire as much as an aggregate of 20 million shares of

ResMed, Inc. stock. This share repurchase program has no expiration date. Since 2009, RMD has seen

common share growth rates of -2.3%, -0.2%, 1.0% (positive), -4.3% and -2.0%, respectively. To account

for the share repurchase program we forecasted a growth of -2.0% for all forecasted years. This was

slightly higher negative growth than the previous 5 year average of -1.6%.

Dividend Growth: RMD first began issuing a cash dividend in 2013 at $0.68 per share. It then raised the

dividend by 47% in 2014 to an even $1.00 per share. Without further guidance as to what the firm’s

future dividend policy might be, our forecasts did not include any increases for 2015, 2016 or 2017. We

did include a modest dividend increase of 3.0% for 2018 and all future years thereafter.

Balance Sheet Inputs

Cash and cash equivalents: For the years 2009 through 2013, ResMed’s cash and cash

equivalents average as a percent of sales is 53.2%. This average is elevated due extremely high

levels of cash and equivalents in 2011, 2012 and 2013 where the percentages were 59.1%, 59.2

and 57.8, respectively. We believe that the cash to sale ratio in excess of 50% is too high and

that the company will decrease its cash and equivalents to a more normalized level. Therefor

we have tapered down our forecast from 53% in 2014 to 40% in 2018 and all future years.

Receivables: We see total receivables are stable around the historical average, which means it

is appropriate to leave it unadjusted in the forecast at 22.0%.

Inventory: Although inventory has been trending down significantly from 16.2% in 2011 to 9.6%

in 2013, we would like more remain a little conservative and therefore have increased it slightly

from 2013 to 10% for all forecasted years.

Page 8: Sector: Healthcare BUY · Current Price $47.08 Economic Value‐Added (ttm) $181 Short Interest (% of Shares) 25.3% Teleflex Incorporated 12‐mo. Target Price $48.50 Free Cash Flow

NYSE: RMD

Total current assets: Since 2011, total current assets have decreased from 104% of sales to

95.7%. Because of the decrease of revenue growth projected in 2014, we have also decreased

the total current assets ratio to 95% for that year. The remaining forecasted years use a rate of

99.7% which is the previous three year average.

Net PP&E: Over the previous 5 years, ResMed has been able to decrease their Net PP&E as a

percent of sales. In 2001, Net PP&E represented 41% of sales as of 2013 that number has

dropped to 27.2%. Because of increasing of R&D expenditure, we believe the 5 year average of

34.5% is appropriate for all years of our forecast.

Total assets: Due to increasing of Net PP&E as explained above, we provided for a modest

increase to total assets up to 157%. This is less than 1% above the previous 5 year average of

156.3%

Accounts Payable & Current liabilities: These are stable around the historical average of

11.4%, which means it is appropriate to leave it unadjusted in the forecast.

Total Debt: ResMed will repay all long-term debt principal in 2014. There is no evidence to

show ResMed will issue new debt, however we still would like to remain more conservative and

therefore have forecasted total debt at 8% for all forecasted years.

Total Equity: In recent years, total equity has been on a down trend from a level of 139.2% in

2011 to 106.3% in 2013. Because of ResMed’s common stock repurchase program, we have

further decreased it to 100% for our forecast.

Page 9: Sector: Healthcare BUY · Current Price $47.08 Economic Value‐Added (ttm) $181 Short Interest (% of Shares) 25.3% Teleflex Incorporated 12‐mo. Target Price $48.50 Free Cash Flow

NYSE: RMD

Value Creation

EVA

EVA measures the true economic profit generated by the firm. A firm produces economic profit

when the operating profits generated exceed the costs of all capital invested in the business

including equity and debt. As such, the drivers of EVA are a form of accounting profit and the

cost of capital. As the gap between the two drivers grows, more EVA is being generated. RMD

has consistently maintained a profit

margin (measured here as EBITDAR

Margin) in excess of 35% while its capital

costs as a percentage of sales have drifted

downward. This widening gap is a good

sign that the company is generating

economic profit by successfully managing

expenses and maintaining a low cost of

capital.

MVA

MVA measures the wealth a company has created for its shareholders. This wealth is the

difference between the market value of the firm and the total invested capital in the business.

Compared below with EVA, we can see that

both have been trending upwards since

2009. As the graph shows, there was a

small decrease in EVA in 2011. That same

year, the MVA experienced its own slide

when the P/E ratio dropped from 27.5 in

2010 to 17.1 in 2011.

Page 10: Sector: Healthcare BUY · Current Price $47.08 Economic Value‐Added (ttm) $181 Short Interest (% of Shares) 25.3% Teleflex Incorporated 12‐mo. Target Price $48.50 Free Cash Flow

NYSE: RMD

Weighted Average Cost of Capital (WACC) Assumptions In order to determine RMD’s cost of capital, the risk-free rate was set at 2.678%, the 5-Yr Beta was

smoothed to 0.83 and the market risk premium was set at 6.0%. This yielded a CAPM cost of equity of

7.658% and, since RMD’s uses very little debt, a WACC of slightly less than 7.7%.

Value Spread

As was explained previously, RMD has shown the ability to consistently create economic value through

increasing profits while minimizing the cost of capital. We expect this trend to continue into the future.

In 2013, RMD achieved a ROIC of 19%. While our forecasts project ROIC to return to a level more

consistent with its historic average, we still expect a value spread that will remain in excess of 7.5% for

all forecasted years.

Cost of Capital 2011 Weight % Cost Wgt Cost

Equity Capita l ization 6,730 100.0% 7.7% 7.7%

Tota l Debt 1 0.0% 5.0% 0.0%

Preferred Stock 0 0.0% 0.0% 0.0%

Value of Al l Securi ties 6,731 100.0%

Effective Tax Rate 20.2% Long-Term Growth Rate:

Risk-Free Rate 2.678% 3.5%

5-Yr Beta 0.743 Alternative Beta:

Market Risk Premium 6.0% 0.83

CAPM Cost of Equity 7.658%

7.658%Weighted Average Cost of Capital:

Page 11: Sector: Healthcare BUY · Current Price $47.08 Economic Value‐Added (ttm) $181 Short Interest (% of Shares) 25.3% Teleflex Incorporated 12‐mo. Target Price $48.50 Free Cash Flow

NYSE: RMD

Recommendation Summary

ResMed is a leading developer, manufacturer and distributor of medical equipment for treating

sleep-disordered breathing (SDB) and other respiratory disorders. RMD operates in an industry

that is expected to achieve robust growth in the coming years and is well positioned as an

industry leader to take advantage of this expected growth in the U.S. and abroad. ResMed has

generated strong free cash flows from last two years, with a superb ROIC of 19% and with a

corresponding WACC of 7.7% for 2013. Using a conservative forecasting approach, ResMed is

currently under-valued in the market, based on the present value of FCF.

With a 2014 per share intrinsic value of $56.28 and the current undervalued market price of

$949.25, and RMD’s strong value spread between the ROIC and WACC, RMD is an attractive buy

and hold stock for the Student Investment Fund.

Page 12: Sector: Healthcare BUY · Current Price $47.08 Economic Value‐Added (ttm) $181 Short Interest (% of Shares) 25.3% Teleflex Incorporated 12‐mo. Target Price $48.50 Free Cash Flow

RMD ResMed Inc. Sector Healthcare Report Date 5/10/2014 2008

2008 2009 2010 2011 2012 2013 2014E 2015E 2016E 2017E 2018E

Total Revenue 835 921 1,092 1,243 1,369 1,514 1,581 1,692 1,793 1,883 1,949

Gross Profit 497 554 655 744 821 941 964 1,032 1,094 1,149 1,189

Operating Income 150 194 243 269 294 380 332 355 377 395 409

Net Income 110 146 190 227 255 307 275 306 324 341 353

Retained Earnings 548 695 885 1,112 1,367 1,577 1,712 1,881 2,071 2,279 2,499

Total Common Shares 155 151 151 152 146 143 140 137 135 132 129

Total Diluted Shares 157 154 155 157 149 146 143 141 138 135 132

Earnings Per Share $0.71 $0.97 $1.26 $1.49 $1.75 $2.15 $1.96 $2.23 $2.41 $2.58 $2.73

Dividends Per Share $0.00 $0.00 $0.00 $0.00 $0.00 $0.68 $1.00 $1.00 $1.00 $1.00 $1.03

2008 2009 2010 2011 2012 2013 2014E 2015E 2016E 2017E 2018E

Cash and Equivalents 321 416 489 735 810 876 838 846 843 828 780

Total Receivables 209 214 232 284 285 327 347 372 394 414 428

Inventory 158 157 186 201 174 146 158 169 179 188 195

Total Current Assets 739 853 985 1,292 1,361 1,449 1,502 1,687 1,788 1,877 1,943

Net PPE 357 378 387 462 434 411 546 584 619 650 672

Total Assets 1,406 1,508 1,626 2,069 2,138 2,211 2,482 2,656 2,815 2,956 3,060

Payables and Accruals 108 106 127 140 160 166 180 193 204 215 222

Total Current Liabilities 193 269 313 209 253 574 414 443 470 493 511

Total Debt 93 94 0 100 251 1 126 135 143 151 156

Total Equity 1,082 1,115 1,288 1,731 1,608 1,611 1,581 1,692 1,793 1,883 1,949

Historical Income Statement Highlights Forecasted Income Statement Highlights

Historical Balance Sheet Highlights Forecasted Balance Sheet Highlights

$0

$500

$1,000

$1,500

$2,000

$2,500

Total Revenue

$0

$50

$100

$150

$200

$250

$300

$350

$400

Net Income

$0

$500

$1,000

$1,500

$2,000

$2,500

Total Current Assets Cash and Equivalents

0

50

100

150

200

250

300

0

500

1,000

1,500

2,000

2,500

Total Equity Total Debt

$0.00

$0.50

$1.00

$1.50

$2.00

$2.50

$3.00

Earnings Per Share Dividends Per Share

$0

$500

$1,000

$1,500

$2,000

$2,500

$3,000

$3,500

Total Assets Net PPE

RMD-UL. Datasource: CapitalIQ Financial Analysis & Valuation, Page 1 of 10 Copyright Robert A. Weigand, Ph.D., 2013

Page 13: Sector: Healthcare BUY · Current Price $47.08 Economic Value‐Added (ttm) $181 Short Interest (% of Shares) 25.3% Teleflex Incorporated 12‐mo. Target Price $48.50 Free Cash Flow

Margins 2008 2009 2010 2011 2012 2013 2014E 2015E 2016E 2017E 2018E

Gross Profit Margin 59.5% 60.1% 60.0% 59.8% 60.0% 62.1% 61.0% 61.0% 61.0% 61.0% 61.0%

Operating Profit Margin 18.0% 21.0% 22.3% 21.7% 21.5% 25.1% 21.0% 21.0% 21.0% 21.0% 21.0%

Net Profit Margin 13.2% 15.9% 17.4% 18.3% 18.6% 20.3% 17.4% 18.1% 18.1% 18.1% 18.1%

Free Cash Flow Margin 6.6% 2.1% 6.4% 0.0% 16.4% 16.6% 9.6% 12.7% 13.8% 14.9% 17.4%

Liquidity and Debt 2008 2009 2010 2011 2012 2013 2014E 2015E 2016E 2017E 2018E

Days Sales Outstanding 91.45 84.90 77.60 83.28 76.13 78.87 80.16 80.16 80.16 80.16 80.16

Inventory Turnover 5.28 5.85 5.88 6.19 7.85 10.38 10.00 10.00 10.00 10.00 10.00

Total Debt to Equity 8.6% 8.4% 0.0% 5.8% 15.6% 0.0% 8.0% 8.0% 8.0% 8.0% 8.0%

Total Debt to Assets 6.6% 6.2% N/A 4.8% 11.7% 0.0% 5.1% 5.1% 5.1% 5.1% 5.1%

Profitability 2008 2009 2010 2011 2012 2013 2014E 2015E 2016E 2017E 2018E

Total Asset Turnover 0.59 0.61 0.67 0.60 0.64 0.69 0.64 0.64 0.64 0.64 0.64

Equity Multiplier 1.30 1.35 1.26 1.20 1.33 1.37 1.57 1.57 1.57 1.57 1.57

Return on Assets 7.8% 9.7% 11.7% 11.0% 11.9% 13.9% 11.1% 11.5% 11.5% 11.5% 11.5%

Return on Equity 10.2% 13.1% 14.8% 13.1% 15.9% 19.1% 17.4% 18.1% 18.1% 18.1% 18.1%

Return on Capital 11.2% 13.3% 15.2% 13.0% 14.6% 19.0% 15.5% 15.9% 16.4% 16.9% 17.6%

0.000.200.400.600.801.001.201.401.601.80

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Total Asset Turnover Equity Multiplier

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RMD-UL. Datasource: CapitalIQ Financial Analysis & Valuation, Page 3 of 10 Copyright Robert A. Weigand, Ph.D., 2013

Page 14: Sector: Healthcare BUY · Current Price $47.08 Economic Value‐Added (ttm) $181 Short Interest (% of Shares) 25.3% Teleflex Incorporated 12‐mo. Target Price $48.50 Free Cash Flow

Capital, NOPAT & FCF 2008 2009 2010 2011 2012 2013 2014E 2015E 2016E 2017E 2018E

NOWC 580 681 780 1,080 1,109 1,184 1,163 1,194 1,211 1,216 1,180

Net Fixed Assets 357 378 387 462 434 411 546 584 619 650 672

Total Invested Capital 937 1,059 1,167 1,542 1,543 1,595 1,709 1,777 1,830 1,865 1,853

Effective Tax Rate 30.1% 27.4% 27.1% 25.3% 23.2% 20.2%

NOPAT 105 141 178 201 226 303 265 283 300 315 326

Free Cash Flow N/A 19 70 -174 225 251 151 214 247 280 339

NOPAT Per Share 0.68 0.93 1.18 1.32 1.55 2.12 1.89 2.06 2.23 2.39 2.53

FCF/Share N/A 0.13 0.46 -1.14 1.54 1.76 1.08 1.56 1.84 2.13 2.62

Return on Capital 11.2% 13.3% 15.2% 13.0% 14.6% 19.0% 15.5% 15.9% 16.4% 16.9% 17.6%

Intrinsic Value of FCFs Valuation Model

Value Creation 2008 2009 2010 2011 2012 2013 2014E 2015E 2016E 2017E 2018E

Economic Value-Added 33 60 88 83 108 181 134 147 160 173 185

Market Valued-Added 1,818 2,838 3,940 2,142 4,457 5,120 6,303 6,527 6,741 6,950 7,115

PV of Future FCFs 4,984 5,346 5,686 6,295 6,553 6,803 7,173 7,508 7,835 8,155 8,440

Value of Non-Oper. Assets 321 416 489 735 810 876 838 846 843 828 780

Total Intrinsic Firm Value 5,305 5,762 6,175 7,030 7,362 7,679 8,011 8,354 8,678 8,983 9,220

Intrinsic Value of Equity 5,211 5,668 6,175 6,930 7,111 7,679 7,885 8,218 8,535 8,833 9,064

Per Share Intrinsic Value $33.67 $37.47 $40.92 $45.45 $48.74 $53.71 $56.28 $59.86 $63.43 $66.99 $70.14 0.08300867

Year-End Stock Price $18.74 $26.14 $34.64 $25.40 $41.57 $47.08 $44.43

Over (Under) Valuation/Sh ($14.93) ($11.34) ($6.28) ($20.05) ($7.17) ($6.63)

% Over (Under) Valued -79.7% -43.4% -18.1% -79.0% -17.3% -14.1%

Cost of Capital 2013 Weight % Cost Wgt Cost

Equity Capitalization 6,730 100.0% 7.7% 7.7%

Total Debt 1 0.0% 5.0% 0.0%

Preferred Stock 0 0.0% 0.0% 0.0%

Value of All Securities 6,731 100.0%

Effective Tax Rate 20.2% Long-Term Growth Rate:

Risk-Free Rate 2.678% 3.5%

5-Yr Beta 0.743 Alternative Beta:

Market Risk Premium 6.0% 0.83

CAPM Cost of Equity 7.658%

7.658%

(Tax rate from last historical year used in forecasts)

Weighted Average Cost of Capital:

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Year-End Stock Price Per Share Intrinsic Value

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RMD-UL. Datasource: CapitalIQ Financial Analysis & Valuation, Page 5 of 10 Copyright Robert A. Weigand, Ph.D., 2013

Page 15: Sector: Healthcare BUY · Current Price $47.08 Economic Value‐Added (ttm) $181 Short Interest (% of Shares) 25.3% Teleflex Incorporated 12‐mo. Target Price $48.50 Free Cash Flow

Relative Valuation 2008 2009 2010 2011 2012 2013 2014E 2015E 2016E 2017E 2018E

Stock Price/Intr. Value $18.74 $26.14 $34.64 $25.40 $41.57 $47.08 $56.28 $59.86 $63.43 $66.99 $70.14

Price to Earnings 26.3 27.0 27.5 17.1 23.8 21.9 28.7 26.8 26.3 25.9 25.7

Price to Free Cash Flow N/A 208.2 75.0 N/A 27.0 26.8 52.1 38.3 34.5 31.5 26.7

Price to Sales 3.5 4.3 4.8 3.1 4.4 4.4 5.0 4.9 4.8 4.7 4.7

Price to Book 2.1 2.6 3.2 1.9 2.8 3.0 3.2 3.1 3.0 3.0 3.0

Earnings Yield 3.8% 3.7% 3.6% 5.9% 4.2% 4.6% 3.5% 3.7% 3.8% 3.9% 3.9%

Dividend Yield N/A N/A N/A N/A N/A 1.4% 1.8% 1.7% 1.6% 1.5% 1.5%

Free Cash Flow Yield N/A 0.5% 1.3% -4.5% 3.7% 3.7% 1.9% 2.6% 2.9% 3.2% 3.7%

Relative Valuation Pricing Model Adjust 2014E Target Dividend Discount Valuation Model

2014E Ratio Ratio Ratio Metric Price RMD ResMed Inc.

Price to Earnings 28.7 $1.96 $56.28 47.0% 3.0%

Price to Free Cash Flow 52.1 $1.08 $56.28 2008 2009 2010 2011 2012 2013 2014E 2015E 2016E 2017E 2018E

Price to Sales 5.0 $11.29 $56.28 $0.00 $0.00 $0.00 $0.00 $0.00 $0.68 $1.00 $1.00 $1.00 $1.00 $1.03

Price to Book 3.2 $17.72 $56.28

1-Yr Div Growth N/A PV Dividends 1-4 $3.34 Dividend Yield 2.2%

2014E 3-Yr Div Growth N/A PV Perpetual Div. $16.45

Current Price $44.43 5-Yr Div Growth N/A Intrinsic Value $19.79 If Purchased For: $44.43

PV of Free Cash Flows $56.28 Risk-Free Rate 2.68% Current Price $44.43 Expected Return = -12.0% -16.02%

Dividend Discount Model $19.79 5-Yr Beta 0.74 ($44.43) $1.00 $1.00 $1.00 $23.10 $22.10

Price to Earnings $56.28 Market Premium 6.0% Analyst Notes:

Price to Free Cash Flow $56.28 Required Return 7.7% Based on a current dividend of $0.68, expected growth as shown above and an equity required

Price to Sales $56.28 Alternative Beta 0.83 return of 7.7%, RMD is worth $19.79 per share, vs. a current price of $44.43.

Price to Book $56.28

Compared With: Compared With:

Edwards Lifesciences Corp. S&P 500 Index

Teleflex Incorporated

Expected Dividend Growth Rates

Estimated Target Prices vs. Current Price

May 10, 2014

Annual Dividend

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Current Price PV of FreeCash Flows

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Estimated Target Prices vs. Current Price

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RMD-UL. Datasource: CapitalIQ Financial Analysis & Valuation, Page 7 of 10 Copyright Robert A. Weigand, Ph.D., 2013

Page 16: Sector: Healthcare BUY · Current Price $47.08 Economic Value‐Added (ttm) $181 Short Interest (% of Shares) 25.3% Teleflex Incorporated 12‐mo. Target Price $48.50 Free Cash Flow

Piotroski Financial Fitness Scorecard (10-point scale) 2009 2010 2011 2012 2013 2014E 2015E 2016E 2017E 2018E

Positive Net Income 1 1 1 1 1 1 1 1 1 1

Positive Free Cash Flow 1 1 0 1 1 1 1 1 1 1

Growing ROA (% change NI > % change TA) 1 1 0 1 1 0 1 1 0 0

Earnings Quality (Operating Income > Net Income) 1 1 1 1 1 1 1 1 1 1

Total Assets Growing Faster Than Total Liabilities 0 1 1 0 0 1 1 0 0 1

Increasing Liquidity (Current Ratio) 0 0 1 0 0 1 0 0 0 0

% Change Shares Outstanding (Diluted) < +2.0% 1 0 0 0 0 0 0 0 0 0

Expanding Gross Margin 1 0 0 1 1 0 0 0 0 0

Asset Turnover (% change sales > % change assets) 1 1 0 1 1 0 0 0 0 0

Total Liabilities to Operating Cash Flow (EBIT) < 4.0 1 1 1 1 1 1 1 1 1 1

Piotroski Score 8 7 5 7 7 6 6 5 4 5

Altman Probability of Bankruptcy Z-Score Weight 2009 2010 2011 2012 2013 2014E 2015E 2016E 2017E 2018E

(Current Assets-Current Liabilities)/Total Assets 1.200 0.4649 0.4963 0.6285 0.6221 0.4748 0.5258 0.5617 0.5617 0.5617 0.5617

Retained Earnings/Total Assets 1.400 0.5091 0.5981 0.5988 0.7281 0.8655 0.8892 0.9022 0.9351 0.9806 1.0430

Earnings Before Interest & Tax/Total Assets 3.300 0.4241 0.4938 0.4294 0.4544 0.5666 0.4414 0.4414 0.4414 0.4414 0.4414

Market Value Equity/Total Liabilities 0.600 6.0388 9.2559 6.8710 6.8630 6.7280 5.2493 5.1136 5.0098 4.9379 4.8958

Sales/Total Assets 0.999 0.6100 0.6710 0.6003 0.6395 0.6844 0.6363 0.6363 0.6363 0.6363 0.6363

Altman Score 8.05 11.52 9.13 9.31 9.32 7.74 7.66 7.58 7.56 7.58

The interpretation for the Altman Score is: Safe Zone = Z > 2.9, Grey Zone = 1.23 < Z < 2.9, Distress Zone = Z < 1.23

0123456789

Piotroski Financial Fitness Scorecard (10-pt scale)

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Altman Probability of Bankruptcy Z-Score

RMD-UL. Datasource: CapitalIQ Financial Analysis & Valuation, Page 9 of 10 Copyright Robert A. Weigand, Ph.D., 2013


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