TTM Technologies: An Electronic Manufacturing Services Bargain

TTM Technologies (TTMI) is attractively valued at the 12/17/08 closing price of 5.36. The price represents a TTM P/E of 4.7, for a solid competitor with an excellent 10 year growth record. Based on the successful integration of its 2006 acquisition of Tyco's backplane operation, strong operational management, and the opportunities presented by its efforts to expand its global footprint, my target price would be 12 within a two year time frame.

TTMI for many years competed successfully in the manufacture of printed circuit boards, and in 2006 acquired Tyco's backplane operations in a merger of approximately equal sales volumes. I owned the company on and off with good results from 2001 to 2006, but backed off until the outcome of the large acquisition became clear. To assess the historical performance of the merged entity, I look at the pro forma combination figures and add trailing twelve months results through 9/30/08:

Until its last guidance, earnings per share had been developing favorably for several years. TTMI operates in the Electronics Manufacturing Industry which is cyclical, competitive, and characterized by low margins. The PCB business is relatively high margin, but the backplane business carries a lower margin. The operating margins for the combined operations improved fairly steadily after the acquisition, demonstrating a successful integration and good operating management.

Unfortunately, TTMI will not escape the general slowdown and has guided 4th quarter 2008 earnings to a range of .14 to .19, on revenues of 156 to 164 million. Annualizing the current guidance and averaging 5 years worth of earnings, I get .71. Guessing that long term growth will be 7%, I apply a P/E of 17 and arrive at a target of 12. Earlier this year, before the slowdown, I thought I saw 20.

The EMS business is generally regarded as being in the process of consolidation. As a relatively small player, TTMI is subject to competitive pressures. A weakness, or an opportunity, depending on how you look at it, is TTMI's lack of a local presence in the Asian market.

The long term issue is that TTMI needs to establish a global footprint, i.e. do an Asian acquisition or partnership. I listened to the 2nd quarter conference call and most of the analysts focused on management's progress on this project. They are working diligently on it, looking at various possibilities, but they intend to get it right and are not going to do a deal just to make something happen. The successful integration of the large size Tyco backplane acquisition demonstrates that management is capable in this area, and it is a positive sign that they are taking a deliberate approach to the next deal.

On the 3rd quarter conference call, analysts seemed more interested in what would be done with the funds being held for the prospective acquisition. Buying back debt was mentioned as a possible use of the funds, or a US acquisition, with so many companies trading at deep discounts. What I heard was that management still favors the Asian acquisition strategy and is still determined to get it right.

I have been accumulating a position in TTMI since May last year, with an average cost of 8.45. A concern is that margins can contract rapidly if revenue is too low or the mix of business is not favorable. A possible catalyst would be an Asian acquisition – TTMI would be more attractive with a global footprint. I plan to monitor quarterly, with special attention to margins, revenue projections, and possible acquisitions.