TELEDYNE: Company Boosted By Focus on Specializations

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After a financially rocky 2001 following its spin-off from Allegheny Technologies, Teledyne refocused on core niche markets, such as defense electronics and instrumentation, which require specialized technology and have high barriers to entry. Analysts say an aggressive yet measured acquisition strategy has enabled the company to fill in holes.


The company made five acquisitions in 2006 alone, most notably spending $168 million last fall to buy Thousand Oaks-based Rockwell Scientific Co., known for developing imaging sensors and space-age materials used in spy satellites and the Hubble Space Telescope.


“The Rockwell acquisition has already contributed good strong order flow from existing operations,” Quilty said. “But the real opportunity going forward is for Teledyne to bring its manufacturing and production expertise to an operation that historically been more focused on research and development.”



Niche markets

Two smaller acquisitions this year were aimed at gaining access to certain niche markets. April’s purchase of New Hampshire-based D.G. O’Brien Inc., a manufacturer of underwater electrical and fiber optic equipment, should aid both its naval and oil-and-gas exploration businesses.


And in June, a Teledyne subsidiary bought Sunnyvale-based Tindall Technologies, which makes microwave radio subsystems used in Navy and Air Force training apparatus.


Despite its aggressive acquisition strategy, Teledyne continues to show strong cash flow, with cash from operations in the first quarter up more than 300 percent from a year earlier to $36.5 million. Teledyne also beat both Wall Street’s and its own forecasts, which tend toward the conservative to account for the lumpiness of its government revenue stream.


Management’s tendency to give conservative guidance triggered a moderate sell-off at the beginning of the year, after officials said increased expenses related to its acquisitions along with an anticipated slowdown in sales of geophysical sensors would likely dampen 2007 earnings.


But in April, the company reported a first quarter that beat analyst estimates, and Chief Executive Robert Mehrabian raised management’s full year forecast by 9 cents to a range of $2.42 to $2.48 a share.


Analysts give a lot of the credit to management for the company’s performance in recent years, particularly to Mehrabian, a mechanical engineer whose resume includes stints as dean of engineering at the University of California, Santa Barbara in the 1980s and president of Carnegie Mellon University in the 1990s. He brought his expertise in efficient “lean manufacturing” techniques to Teledyne in 1999.


“In many cases being a research-physicist-Ph.D. academic, in a lot of corporate history, can be the kiss of death,” Quilty said. “In the case of Teledyne, his skill set has proven to be a very good fit.”


Consolidation of smaller defense contractors is considered likely as defense spending levels off in the coming years. Both Quilty and Lewis consider Teledyne, with its $1.6 billion market cap, among the more likely to be able to remain independent. Calls to company officials were not returned.


Product diversity is one reason. Though it has a high profile as a prime contractor or subcontractor to the U.S. government, around 60 percent of total sales in 2006 were to commercial customers. It’s one of two primary manufacturers of piston engines used in such general aviation aircraft as the Raytheon Beech Bonanza and the Piper Seneca.


“They are among a handful of companies that could survive a consolidation in the small-cap defense space,” Lewis said. “They have a strong position in each of their markets and their internal plan is to build this into a multibillion dollar revenue base before they consider anything.”

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