Goldman loves this ‘cash flow compounder’ and predicts nearly 30% upside

Teledyne Technologies is one company investors can rely on amid an uncertain economic environment, according to Goldman Sachs. The bank upgraded the industrial conglomerate, whose products range from digital imaging sensors to aviation electronics, to buy from neutral Monday, with a $495 per share price target. Goldman Sachs’ forecast implies 29% upside from Friday’s $383.39 close. “TDY is one of the highest quality, most consistent, best managed companies we cover that compounds cash flow over time,” analyst Noah Poponak said. “We see upside to consensus earnings expectations and find current valuation attractive.” Cash flow compounders reinvest their excess free cash flow each year back into the company at a rate that is sustainable and provides long-term growth. Teledyne has compounded free cash flow at a 17% compound annual growth rate over the last decade, according to the Goldman note. According to Poponak, Teledyne’s margins have expanded over time by shifting into higher value-added business lines, which he expects will support continued EPS and free cash flow compounding long term. Its revenue has also experienced minimal volatility, he said. Another catalyst that will drive higher earnings and cash flow is Teledyne’s merger and acquisition efforts, the analyst said. Since 2004, Teledyne has made over 50 acquisitions, mostly in technology-related and higher-margin businesses, which have driven the company’s earnings power. Its largest deal was in May 2021, when Teledyne acquired thermal imaging camera maker FLIR Systems for $8.2 billion. Shares of Teledyne are up 4% in early trading Monday. The stock is unchanged in 2023 after falling 8.5% in 2022. Poponak attributes this year’s backsliding to concerns about the company’s long-term profit margin level in its digital imaging segment but expressed confidence in revenue and margin acceleration in the segment moving forward. Digital imaging accounts for 57% of revenue, according to FactSet data. “We believe that recent weakness in the stock post TDY’s 2Q23 earnings release provides investors with an opportunity to buy this high-quality, earnings and cash flow compounder with a long track record of strong operational execution currently trading at the low end of the company’s historical range, both on an absolute basis and relative to peers,” Poponak wrote. — CNBC’s Michael Bloom contributed reporting.