Teledyne Technologies: Recent Weakness Creates Entry Opportunity

Teledyne Technologies (NYSE: TDY) is an industrial technology company producing niche technology products for a variety of industries including healthcare, aerospace, energy and natural resources. Over the past year, the company's shares are down over 14% but I believe this creates an interesting opportunity to get into a quality small-cap name. 

The company has a very stable portfolio of diverse clients, as over a quarter of the company's revenue comes from the U.S. Federal Gov't. Moreover, the company operates in industrial technology markets going through complete refresh cycles, as instrumentation and emission monitoring systems markets are expected to compound at 10.4% CAGR over the next 5 years, while the portable analytic instrumentation market is expected to grow by over 17% through 2020. On current conservative estimates, the company is expected to grow at high single digits and has an excellent track record of providing significant returns on invested capital: over the past decade, gross margins have grown from 28% to over 37%, book value per share has tripled, while free cash flow has more than tripled. ROE and ROIC are at a healthy 14.13% and 9.02% respectively while cash flow as a percentage of sales is over 7%. What is interesting though is that the company is going through a transformation as it has seen an increase in its retained earnings over the last 5 quarters by 12.8% while cash and equivalents have been increasing over the last 3 quarters by 50%.

There are some headwinds for the company including the drag on energy and oil and gas markets which have destabilized energy spending. Energy infrastructure has typically accounted for a quarter of TDY's revenues and the company understands it is a key vertical in its instrumentation segment. It is unclear when the price of oil will continue to rally or drop below $40 a barrel, but uncertainty in the energy markets may distort short term earnings for the company leading to further downside. However, for the patient and long-term investor, TDY's long-term stewardship and timely acquisitions will allow it to hit double digit CAGR for years to come.