Seeking Alpha
, Portfolio123 (2,143 clicks)
Long only, value, research analyst, dividend investing
Profile| Send Message|
( followers)  

I find Teradyne Inc. (NYSE:TER) stock as a good combination of value and growth tech stock. The stock has risen only 13.4% since the beginning of 2013; this compared to 25.5% rise of the S&P 500 index, and 36.7% rise of the Nasdaq Composite Index at the same period, but from now on it has plenty of room to move up. In this article, I will explain why, in my opinion, Teradyne stock is a remarkably promising long-term investment.

The Company

Teradyne 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. Teradyne, Inc. was founded in 1960 and is headquartered in North Reading, Massachusetts.

Products

Teradyne's automatic test equipment products and services include: Semiconductor test systems, wireless test systems, military/aerospace test instrumentation and systems, storage test systems, and circuit-board test and inspection systems.

(click to enlarge)

Source: 2012 Letter to Shareholders

The 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. 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.

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. A ratio of above one implies that more orders were received than filled, indicating strong demand, while a ratio below one implies weaker demand. On January 23, 2014, SEMI.ORG announced that the North American semiconductor equipment industry posted December 2013 book-to-bill ratio of 1.02. The three-month average of worldwide bookings in December 2013 was $1.38 billion. The bookings figure is 11.1% higher than the final November 2013 level of $1.24 billion, and is 48.3% higher than the December 2012 order level of $927.4 million. The three-month average of worldwide billings in December 2013 was $1.35 billion. The billings figure is 20.8% higher than the final November 2013 level of $1.11 billion, and is 33.8% higher than the December 2012 billings level of $1.0 billion.

On that occasion, Denny McGuirk, president and CEO of SEMI said:

Through the final quarter of 2013, both bookings and billings continually improved. The December three-month average bookings were at the highest level since June 2012 - a positive sign for the 2014 spending outlook.

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

Source: SEMI.ORG

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

(click to enlarge)

(click to enlarge)

Source: SEMI.ORG

Valuation Metrics

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

Teradyne's valuation metrics are good; the company has a very low debt, the forward P/E is very low at 11.90, and the average annual earnings growth estimates for the next five years is quite high at 14.9%. The PEG ratio, using next financial year forward P/E of 11.90 and the annual earnings growth estimates of 14.9%, is very low at 0.80 (forward P/E divided by growth).

Latest Quarter Results

On January 22, 2014, Teradyne reported its fourth-quarter year 2013 financial results, which beat EPS expectations by $0.03 and beat on revenues.

Fourth-Quarter Highlights

  • Q4'13 orders increased 7% from Q3'13
  • Q4'13 revenue of $285 million, down 34% from Q3'13 and up 15% from Q4'12
  • Q4'13 diluted non-GAAP net income of $0.07 per share, down from $0.46 per share in Q3'13 and no change from Q4'12; Q4'13 diluted GAAP net income of $0.09 per share
  • Q1'14 guidance: Revenue of $300 million to $330 million; Diluted non-GAAP net income of $0.02 to $0.09 per share; Diluted GAAP net loss of $(0.09) to $(0.03) per share
  • Quarterly cash dividend of $0.06 per share initiated

In the report, CEO Mike Bradley said:

The fourth quarter capped a strong year of market share gains in both semiconductor and wireless test. While overall industry capital spending was at trough levels in the fourth quarter and was down for the full year, we delivered our 18th consecutive quarter of operating profits and exceeded our model profit rate for 2013 in total.

Also in the report, President Mark Jagiela said:

In line with seasonal trends, orders improved in the fourth quarter and we expect that order trend to accelerate in the first quarter as customers build capacity for new consumer devices in 2014. Our 2013 market share gains have positioned us well for growth in 2014 and we've increased our first quarter production plans to reflect the improving demand environment.

The company offered guidance for the first quarter of 2014, which was below consensus for EPS, and in-line for revenue. Teradyne estimates revenue of $300 million to $330 million, with diluted non-GAAP net income of $0.02 to $0.09 per share and diluted GAAP net loss of $(0.09) to $(0.03) per share. Non-GAAP guidance excludes acquired intangible asset amortization, non-cash convertible debt interest and CEO equity charge, and includes income taxes on a cash basis.

The Company additionally announced that its Board of Directors has approved the initiation of a quarterly cash dividend of $0.06 per share, with the initial quarterly dividend payable on June 2, 2014, to shareholders of record as of the close of business on May 9, 2014. Said Mr. Jagiela:

"Teradyne's operating model provides the financial foundation to support both a dividend and our growth plans."

Quarterly Results

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

(click to enlarge)

(click to enlarge)

Source: Teradyne Quarterly Reports

Teradyne's revenues and order have historically been seasonal, and orders in the third quarter are usually the weakest, as shown in the charts below. Year 2013 fourth-quarter book-to-bill ratio was at 1.02 while year 2012 fourth-quarter book-to-bill ratio was at 1.10. Last quarter was the 18th consecutive quarter of operating profit.

(click to enlarge)

(click to enlarge)

Source: Teradyne Q4-2013 presentation

Yearly Results

The charts below present the Teradyne's annual revenues and earnings per share for each year since 2003.

(click to enlarge)

(click to enlarge)

Source: Teradyne Quarterly and Annual Reports

Teradyne's annual earnings per share have been positive during the last four years, yet descending due to the cyclical behavior of the semiconductor equipment industry. Non-GAAP EPS results were at $1.06 in 2013, $1.67 in 2012, $1.43 in 2011 and $2.17 in 2010.

Competitors and Group Comparison

According to Teradyne, it faces significant competition throughout the world in each of its reportable segments. Competitors in the Semiconductor Test segment include, among others, Advantest Corporation (NYSE:ATE) and LTX-Credence Corporation (LTXC). Competitors in the Systems Test Group include, among others, Agilent Technologies, Inc. (NYSE:A) and Xyratex Ltd. (NASDAQ:XRTX). Competitors in its Wireless Test segment include, among others, Agilent Technologies, Inc., Aeroflex, Inc. (NYSE:ARX), Anritsu Company (OTC:AITUF), National Instruments Corporation (NASDAQ:NATI) and Rohde & Schwarz GmbH & Co. KG.

A comparison of key fundamental data between Teradyne and its main competitors is shown in the table below, the data were taken from Yahoo Finance.

Teradyne's valuation metrics look better than those of its main competitors. In contrast to its competitors Teradyne has shown a profit during the trailing twelve months.

The tables below compare various Teradyne's parameters to its industry median, its sector median and the S&P 500 median. In most parameters of growth rates, margins, return on capital and stock valuation Teradyne looks quite good.

Source: Portfolio123

Technical Analysis

Personally I am using only fundamental analysis for my investment decisions. After many years of experience, and after having tried all kinds of decisions making including technical analysis, I have reached the conclusion that relying on fundamental information is giving me the highest return. Nevertheless, some investors are successfully using technical analysis to find the proper moment to start an investment (I am not talking about traders; my analysis is only for investors). The charts below give some technical analysis information.

(click to enlarge)

Chart: finviz.com

The TER stock price is 4.66% above its 20-day simple moving average, 9.81% above its 50-day simple moving average and 13.46% above its 200-day simple moving average. That indicates a strong short-term, mid-term and long-term uptrend.

(click to enlarge)

Chart: TradeStation Group, Inc.

The weekly MACD histogram, a particularly valuable indicator by technicians, is at 0.25, and ascending, which is bullish (a rising MACD histogram and crossing the zero line from below is considered an extremely bullish signal). The RSI oscillator is at 66.01 which do not indicate oversold or overbought conditions.

Analyst Opinion

Analyst opinion is divided, but most analysts recommend the stock. Among the fifteen analysts covering the stock, four rate it as a strong buy, eight rate it as a buy, and only three rate it as a hold.

Major Development

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 smartphones, 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.

Segments

(click to enlarge)

Annual Revenues (%)

(click to enlarge)

Source: Teradyne Quarterly Reports

The contribution of the Wireless Test segment, which was purchased from LitePoint, to the total Teradyne's revenue increased from 17% in 2012 to 18% in 2013, but in dollars it decreased from $286 million in 2012 to $252 million in 2013.

Balance Sheet

Teradyne has a very strong balance sheet. Cash and marketable securities are at $1,200 million compared to $1,006 million at the end of 2012. Total debt is only $190 million. The company has generated $161 million in free cash flow during 2013 (net cash provided by operating activities minus purchases of property, plant and equipment). The actual current ratio is high at 2.99.

(click to enlarge)

Source: Teradyne Q4-2013 presentation

Discussion

In my opinion, Teradyne will outperform the worldwide wafer fab equipment in 2014. According to SEMI.ORG, in its publication of December 03, 2013, worldwide sales of new semiconductor manufacturing equipment will increase in 2014 by 23.2% to $39.46 billion. System-on-chip (SOC) orders should trend up in 2014 as semiconductor manufacturers and test providers resume equipment purchases following a period of digestion last year.

In think that Teradyne's decision to acquire the privately held LitePoint was a smart move. Although the Wireless Test segment (LitePoint) has not shown growth in 2013 in terms of revenue, it can expand Teradyne'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 an IDC report from September 11, 2013, the worldwide smart connected device market, comprised of PCs, tablets, and smartphones, is forecast to grow 27.8% year over year in 2013, slightly lower than the 30.3% growth in 2012. Smartphones will continue to ship in high volumes, surpassing 1.4 billion units in 2015 and accounting for 69% of all smart connected device shipments worldwide.

Risk

According to Teradyne, Capital equipment providers in the electronics and semiconductor industries, such as Teradyne, have, in the past, been negatively impacted by sudden slowdowns in the global economies, and resulting reductions in customer capital investments. The duration and frequency of slowdowns in customer capital investments are difficult to predict.

The market for Teradyne's products is concentrated with a limited number of significant customers accounting for a substantial portion of the purchases of test equipment. In each of the years 2012, 2011 and 2010, its three largest customers in aggregate accounted for 29%, 19% and 21% of consolidated net revenues, respectively. The loss of a significant customer or any reduction in orders by these customers, including reductions due to market or competitive conditions, would likely have a material adverse effect on Teradyne's business, financial condition or results of operations.

Conclusion

As a leading global supplier of automatic test equipment, Teradyne will benefit from the rebound in semiconductor manufacturing equipment spending in 2014. The company has compelling valuation metrics and strong earnings growth prospects, its PEG ratio is extremely low at 0.80. Furthermore, Teradyne has a strong balance sheet and a low debt, its Enterprise Value/EBITDA ratio is very low at 9.64. Teradyne's latest quarter financial results were better than analyst expectations, and the company declared first time dividend payment saying that the company's operating model provides the financial foundation to support both a dividend and its growth plans. In addition the company achieved strong full year share gains in SemiTest and Wireless Test.

All these factors bring me to the conclusion that TER stock is a smart long-term investment.

Source: Teradyne: An Attractive Tech Stock