Even during a down period for the markets, Teledyne has gone against the grain, climbing to $507.77. Its shares have yielded a 16% return over the last six months, beating the S&P 500 by 17.4%. This was partly thanks to its solid quarterly results, and the performance may have investors wondering how to approach the situation.
Is there a buying opportunity in Teledyne, or does it present a risk to your portfolio? Get the full breakdown from our expert analysts, it’s free.
Despite the momentum, we're sitting this one out for now. Here are three reasons why you should be careful with TDY and a stock we'd rather own.
Why Is Teledyne Not Exciting?
Playing a role in mapping the ocean floor as we know it today, Teledyne (NYSE:TDY) offers digital imaging and instrumentation products for various industries.
1. Core Business Falling Behind as Demand Plateaus
In addition to reported revenue, organic revenue is a useful data point for analyzing Inspection Instruments companies. This metric gives visibility into Teledyne’s core business because it excludes one-time events such as mergers, acquisitions, and divestitures along with foreign currency fluctuations - non-fundamental factors that can manipulate the income statement.
Over the last two years, Teledyne failed to grow its organic revenue. This performance was underwhelming and implies it may need to improve its products, pricing, or go-to-market strategy. It also suggests Teledyne might have to lean into acquisitions to accelerate growth, which isn’t ideal because M&A can be expensive and risky (integrations often disrupt focus). 
2. Recent EPS Growth Below Our Standards
While long-term earnings trends give us the big picture, we also track EPS over a shorter period because it can provide insight into an emerging theme or development for the business.
Teledyne’s EPS grew at an unimpressive 4.2% compounded annual growth rate over the last two years. On the bright side, this performance was higher than its 1.9% annualized revenue growth and tells us the company became more profitable on a per-share basis as it expanded.
3. Previous Growth Initiatives Haven’t Impressed
Growth gives us insight into a company’s long-term potential, but how capital-efficient was that growth? Enter ROIC, a metric showing how much operating profit a company generates relative to the money it has raised (debt and equity).
Teledyne historically did a mediocre job investing in profitable growth initiatives. Its five-year average ROIC was 7.5%, somewhat low compared to the best industrials companies that consistently pump out 20%+.
Final Judgment
Teledyne isn’t a terrible business, but it doesn’t pass our quality test. With its shares beating the market recently, the stock trades at 23.6× forward price-to-earnings (or $507.77 per share). At this valuation, there’s a lot of good news priced in - we think there are better investment opportunities out there. Let us point you toward one of our all-time favorite software stocks.
Stocks We Like More Than Teledyne
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