Teradyne: A Strong Buy At Compelling Valuations And Strong Growth Prospects

Jun.10.13 | About: Teradyne Inc. (TER)

Teradyne, Inc. (NYSE:TER) was founded in 1960 and is a leading global supplier of automatic test equipment. The company designs, develops, manufactures and sells automatic test systems and solutions used to test semiconductors, wireless products, hard disk drives and circuit boards in the consumer electronics, wireless, automotive, industrial, computing, communications and aerospace and defense industries.

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Source: Teradyne

Teradyne has remarkably strong earnings growth prospects and considering its fundamentals parameters, it seems that the stock is undervalued.

Valuation Metrics

The table below presents the valuation metrics of Teradyne, the data were taken from Yahoo Finance and finviz.com.

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Chart: finviz.com

Historical Sales and Earnings

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*2013 and 2014 estimates

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*2013 and 2014 estimates

First-Quarter 2013 Results

On April 24, 2013, Teradyne reported its first-quarter 2013 financial results. The results were better than expected, with revenue and earnings coming in above guidance and consensus estimates. Furthermore, the company delivered 47% sequential order growth, driven by 42% increase in Semiconductor Test and 322% increase in Wireless Test. Bookings in the first quarter of 2013 were $400 million, of which $259 million were in Semiconductor Test, $109 million in Wireless Test and $32 million in Systems Test. In addition, the company raised its outlook for the second quarter of 2013. Second quarter guidance: Revenue of $380 million to $420 million; Diluted non-GAAP net income of $0.26 to $0.36 per share; Diluted GAAP net income of $0.12 to $0.20 per share. In the report, CEO Mike Bradley said:

Design wins in LTE cellular test and 3.5" Hard Disk Drive test along with broader demand for semiconductor test systems drove nearly a 50% uptick in company orders in the first quarter. As expected, the test equipment market is on a steady recovery path driven by wireless and applications processor, power management, and microcontroller demand. With the substantial growth in orders, we've raised our second quarter revenue plan to meet the expanding capacity needs of our customers.

LitePoint Acquisition

In October 2011, Teradyne acquired privately held LitePoint, a test equipment maker for wireless products, for up to $580 million net of cash, in order to expand its product portfolio of test equipment in the wireless test sector. LitePoint designs, develops, and supports advanced wireless test solutions for the development and manufacturing of wireless devices, including smart phones, tablets, notebooks, laptops, personal computer peripherals, and other Wi-Fi and cellular enabled devices. LitePoint became Teradyne's Wireless Test segment. There are strong growth prospects for wireless test equipment due to the increasing penetration of mobile devices. LitePoint's product offerings and exposure to the higher growth wireless arenas will allow this segment to substantially outgrow the overall test equipment market in the coming years. First-quarter 2013 LitePoint bookings performance suggests that Teradyne could exceed its target of cellular test share gains.

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Source: Teradyne presentation

The chart below emphasizes the last change in the booking trend toward wireless test equipment. The wireless test new orders in the first quarter of 2013 were 27% of the Teradyne's total new orders, while they represented only 9% of the new orders in Q4 2012.

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Source: Teradyne presentation

Book-to-Bill Ratio

One very important parameter when analyzing a semiconductor company is the book-to-bill ratio, which is the ratio between new orders to actual sells.

Definition of Book-To-Bill Ratio

The ratio of orders received to units shipped and billed for a specified period, generally a month or quarter. The book-to-bill ratio is a widely used metric in the technology industry, specifically in the semiconductor equipment sector. It is closely watched by investors and analysts for an indication of the performance and outlook for individual companies and the technology sector. A ratio of above 1 implies that more orders were received than filled, indicating strong demand, while a ratio below 1 implies weaker demand.

For example, a book-to-bill ratio of 1.10 implies that $110 of orders were received for every $100 of product billed during the period. One of the best-known book-to-bill ratios is the monthly figure released by the Semiconductor Equipment and Materials Institute (SEMI). This is a three-month average bookings and billings figure for semiconductor equipment companies with headquarters in North America, and is a reliable indicator of trends in the worldwide semiconductor industry.

According to SEMI.ORG, the North American semiconductor equipment industry posted April 2013 book-to-bill Ratio of 1.08. The North American book-to-bill Ratio was below one in the second half of 2012, but since January 2013, it is above one. This is a sign of recovery in the semiconductor equipment industry.

The table below presents the North American semiconductor equipment industry's billings, bookings and the book-to-bill ratio since the beginning of 2012.

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Source: SEMI.ORG

The charts below present the North American semiconductor equipment industry's billings, bookings and the book-to-bill ratio since 1991.

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Source: SEMI.ORG

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Source: SEMI.ORG

The charts below present the Teradyne's net revenues, net orders and the book-to-bill ratio for each quarter since 2010.

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Last quarter Teradyne's book-to-bill ratio of 1.43 is much better than the semiconductor equipment industry's book-to-bill ratio.

Semiconductor Industry

Semiconductor and semiconductor equipment manufacturers have historically been highly cyclical, with periods of strong growth and high margins, which have caused companies to raise capital investment, and in effect have caused excess supply followed by periods of weakness. The economic data and companies' comments are all saying essentially the same thing, which is that the semiconductor equipment industry has already passed through the bottom of the current cycle. In addition, the presentation by Apple (NASDAQ:AAPL) CEO Tim Cook on May 28, and by Google (NASDAQ:GOOG) executives at that company's developer conference on May 14, suggest that new Internet applications will extend the compute environment to every day devices like smart television, wearable, cars, light bulbs and more. This development will increase the demand for semiconductor test equipment.

Summary

Highlights:

  • First quarter 2013 results were better than expected, with revenue and earnings coming in above guidance and consensus estimates. Furthermore, the company delivered 47% sequential order growth, driven by 42% increase in Semiconductor Test and 322% increase in Wireless Test.
  • Teradyne's last quarter book-to-bill ratio was very high at 1.43, much higher than the semiconductor equipment's last reported book-to-bill ratio, which was 1.08.
  • There are strong growth prospects for wireless test equipment due to the increasing penetration of mobile devices. First-quarter 2013 LitePoint bookings performance suggests that Teradyne could exceed its target of cellular test share gains.
  • The test equipment market is on a steady recovery path driven by wireless and applications processor, power management, and microcontroller demand.
  • With the substantial growth in orders, Teradyne raised its second quarter revenue plan to meet the expanding capacity needs of its customers.
  • TER's stock price is 2.65% above its 20-day simple moving average, 9.28% above its 50-day simple moving average and 11.52% above its 200-day simple moving average. That indicates a short-term, mid-term and long-term uptrend.

In my opinion, Teradyne's decision to acquire the privately held LitePoint was a smart move that already has shown impressive results, and can expand TER's total available market by more than $1 billion. As we all can see, the world is moving toward mobile, wireless and simple to use product platforms. According to IDC, overall, worldwide shipments of smart connected devices grew 29.1% year over year in 2012, and the entire market pushed past one billion units shipped, with a total market value of $576.9 billion. Tablet sales grew 78.4% year over year in 2012 and are expected to pass desktop sales in 2013 and portable PCs in 2014.

All these factors bring me to the conclusion that Teradyne is a great buy at this moment due to its compelling valuation and its high growth prospects.

Disclosure: I am long TER. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.