Why TTM Technologies Is Worth Considering

Aug.11.14 | About: TTM Technologies, (TTMI)

Summary

TTM Technologies is well positioned in a rapidly growing market.

Expected tailwinds in its favour as clients gear up to launch new product models.

There is limited downside risk with great upside potential on a long term horizon.

Introduction

TTM Technologies (NASDAQ:TTMI) is a leading printed circuit board and backplane assembly provider that has been in existence for more than ten years. It has a total of 13 specialized facilities, seven of which are located in the United States while the remaining six are in China. Its total manufacturing space is about 4.5 million square feet and employs more than 10,000 people.

Now, TTM Technologies is not just your average printed circuit board (PCB) maker and I will shortly explain why. However, before proceeding any further I feel that a brief description of PCBs is warranted for those who are not familiar with the term. Basically, a PCB (as its name suggests) is a printed circuit board manufactured in panels from sheets of laminated material. The material is cladded with copper which is etched to produce patterns of electrical circuitry on which passive and active electronic components can be connected. In short, you can find a PCB in almost all your household electronics such as television sets, music system, and remote controllers.

The PCB fabrication process is fairly easy depending on the nature of application you need. For simple circuits, the etching process can be done on either one or both sides of the copper clad material. The real test comes when the applications become more complex such as the circuitry required for networking equipment, high-end smartphones, tablet PCs and even medical devices which require additional layers of the material. This is what separates TTM Technologies from the rest of the pack.

TTM Technologies has a wide clientele which includes the military, medical device makers, aviation industry and an array of OEMs.

The numbers

As of last year, the PCB market was approximately worth $56 billion with revenue expected to increase by 2-4% in 2014. This increased revenue is expected to be mostly driven by the demand for more functionality and capacity in electronic devices. In short, demand for smaller devices with more features will be the key driver for this market.

According to a 2013 IDC report, the smartphone market will grow by a CAGR of 16% to 1.5 billion units between 2013 and 2017, while the tablet PCs market will grow by a CAGR of 14.9% to 386 million units during the same period. With these numbers in mind, which in my opinion are conservative, I see TTM Technologies as well positioned to reap big rewards from a market with exceptional growth prospects.

TTM Technologies recently released its second quarter earnings (here) which elicited mixed reactions from different quarters. Although net sales for the quarter increased 2% to $297.6 million as compared to the first quarter of this year, this was a drop of almost 12% from the same quarter last year, which posted sales of $338 million. Net sales for the first half of the year also posted an 11% decline to $589.5 million as compared to the first half of 2013.

Gross margins also took a hit as it saw a 20% decline to $38.6 million as compared to the year ago quarter. CFO Todd Schull revealed that the decline in margins was attributed to an unfavorable product mix at their advanced technology plants. From what I can piece together from the conference call, this means that their mobility segment which caters to the smartphone and tablet PCs market experienced softer demand which in turn led to the decline.

Since TTM Technologies operates from two geographical localities namely Asia Pacific and North America, a comparison of the two will offer better insight into the workings of the company. Compared to the year ago quarter, net sales in the Asia Pacific segment registered a 20% decline from $209.6 million to $166.7 million. Again, this was attributed to an unfavorable product mix in the facilities. The North America segment posted a 1.4% increase in net sales from $129.6 million to $131.5 million. Gross margin for the Asia pacific segment was 10.6% and operating income declined to $700,000 from $4.7 million in the first quarter. For the North America segment, gross margin was 16% with an operating income of $8.6 million, up from $4.2 million in the first quarter.

The upside

One important thing that shareholders should be aware of is that this business is more so cyclical in nature. About 50 - 60% of the revenue is usually generated in the second half of the year. This is due to the fact that TTM Technologies' clients transition to new product models in anticipation of the Christmas season during this period. This means that for the remaining half year we will see an increase in revenue driven by the need for newer products.

Lower capacity utilization has also been one of the causes of the decline in margins. This is especially evident in the advanced technology plants but management has been keen to state that this can be effectively dealt with through the right product mix. As the percentage of advanced products demand increases, the ASP will also follow suite which will lead to better margins for the rest of the year. The company also has some substantial backlog in its books with ramp in production scheduled for August and September.

Additionally, sequential growth in the computing and handset business is expected going forward and I believe that this will be important in aiding top line growth. In an effort to mitigate the wide swings in margins and earnings over the different quarters, TTM Technologies has been actively marketing its high density interconnect (HDI) technologies, which are used in smartphones and tablets to be used in more applications such as the automotive and medical industries.

Conclusion

TTM Technologies is one of the top players in the PCB industry and believe that it is often overlooked by a majority. It has solid financials and is well positioned in an industry that doesn't receive much analyst coverage. At current share price of $7.50, I believe that TTM Technologies warrants a closer look since the risk to reward opportunity is quite favorable.

Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.