Teladoc: Structure, Cash Flows to Reignite Investor Confidence

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I am bullish on the stock. (See Teladoc (NYSE:TDOC) stock charts on TipRanks)

Underperformance

Teladoc’s stock has lost more than a third of its value in 2021 for various reasons.

First of all, the company concluded significant acquisitions in 2020, including Livongo Health (NASDAQ:LVGO) and InTouch Health. Acquisitions tend to affect an acquiring company’s balance sheet in the short run, and then add value to it in the long run.

Secondly, Teladoc’s stock was one of the victims of a health-tech sell-off in February, and then again in May, as investors decided to cash in on some of their 2020 profits before it became too late.

The relative strength index suggests that the asset has been close to oversold with a reading of 32.9, which is near its all-time low.

Growth

When companies acquire, they often improve their financing costs due to adding more sustainability to their operating margins. Over the past 22 months, Teladoc has managed to reduce its weighted average cost of capital from 12.9% to 2.9%, which means that investors can expect elevated cash flows moving forward.

Investors are likely also making assumptions about the company’s prospects instead of looking at its tangible results. Teladoc’s CAPEX has grown by 73.9% over the past year.

Analysts anticipate the earnings per share to grow by an additional 77.1% by December 2022. If we combine this with a price-to-book ratio trading at a 73.3% sector discount, we can draw a consensus that we’re looking at an undervalued stock.

Wall Street’s Take

Wall Street thinks Teladoc is a Moderate Buy, with 13 Buy ratings, and eight Hold ratings assigned in the past three months. The average Teladoc price target of $203.20 implies 67% upside potential.

Concluding Thoughts

Teladoc’s stock price has retraced due to spending on acquisitions, but the company has since improved on its capital structure while producing stellar growth in free cash flow.

These factors combined could lead to a significant upside in the stock’s fair value.

Disclosure: At the time of publication, Steve Gray Booyens did not have a position in any of the securities mentioned in this article.

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