"Teradyne: Ensuring Quality in the New Economy"
at fnews.yahoo.com :
Stock of the Day
Dec 20, 1999
Teradyne: Ensuring Quality in the New Economy
Senior Analyst: Luciano Siracusano 12/20/99)
One of the drivers of the 1990?s bull market
has been the buoyant American consumer,
accounting for roughly two-thirds of the
growth in the economy.
Less noticed has been the large portion of the
remaining third stemming from capital investment in new technologies.
Over the past 12 months, companies that sell capital equipment to
semiconductor makers have been among the market?s stronger performers.
Investors in stocks such as Lam Research (NASDAQ:LRCX - news) ,
PMC-Sierra (NASDAQ:PMCS - news) , Applied Materials
(NASDAQ:AMAT - news) and KLA Tencor (NASDAQ:KLAC - news) have
reaped huge gains over the past year.
Another solid member of this cadre is Teradyne Inc. (NYSE:TER - news) ,
whose products help chipmakers and telecommunication providers test their
circuit boards, telephone lines, networks and software.
The stock has been on a roll since the company reported record sales and net
income in October, gaining more than 50% in the last two months.
Teradyne beat the Street?s consensus estimate of $0.31 per share in the
October quarter, earning $0.35 a share, 250% above the year-ago period.
Revenue ballooned to $497 million, a 24% sequential advance and a nearly
50% jump over a year ago.
Incoming orders increased to $490.5 million in the quarter, driven by a 186%
increase in orders for semiconductor test systems. Total backlog through the
first nine months stood at $843 million, compared with $524.7 million
through the first three quarter of 1998.
The company, which has virtually no debt, is improving margins by utilizing
more of its capacity and selling more of its higher-priced products.
One big factor fueling the growth is the communications revolution, with
new demand for chips coming from the wireless, networking, and fiber-optic
sectors.
New technologies -- high definition TV, cable-top boxes, DSL (digital
subscriber lines), chip cards (smart cards) and smart automobiles (cars
equipped with chips used for navigation and communication) - require more
powerful electronic components. Testing them to ensure quality and yield are
essential, providing unique opportunities for companies like Teradyne, which
is a leader in the automatic test equipment (ATE) market.
With more semiconductor companies outsourcing the testing and assembling
of their wafers to third parties, a new market opportunity is being created for
Teradyne, which is well positioned to supply these ?back end? manufacturers.
And the outlook for 2000 remains bright.
Industry Fundamentals Remain Strong
After a three-year-long, capacity-driven correction, exacerbated by an
economic slowdown and depressed prices in Asia, a multi-year recovery is
now underway in the semiconductor equipment industry.
Capital spending is ramping up among integrated circuit (IC)
manufacturers, with total capital spending for the semiconductor industry
projected to jump by nearly 80% to $55.5 billion over the next three years,
according to the market research firm IC Insights.
This is good news for semiconductor equipment makers.
In 1999, the overall market for semiconductor equipment is expected to grow
almost 9% to $23.4 billion and by more than 18% in 2000 to $27.7 billion,
according to forecasts released by Semiconductor Equipment and Materials
International (SEMI).
Sales of wafer process equipment are expected to rise to approximately $17.9
billion in 2000, an 18.7% increase above the $15.1 billion in sales projected for
1999. Demand for test equipment materials will likely stay strong, with year
2000 revenue projected to rise 18.6% from the $4.7 billion consensus estimate
for 1999.
By the end of 2002, SEMI projects shipments by semiconductor equipment
manufacturers will climb to $38.1 billion, an 80% advance from 1998 levels.
Teradyne, which is shipping high volumes of wafer-testing equipment,
should be among the group?s biggest beneficiaries.
The stock, which is currently trading at about 30 times the 2000 consensus
earnings estimate of $1.65 per share, is by no means cheap. Investors who
buy here are taking on valuation risk (the stock is also trading at a
historically high price/sales ratio).
They are also shouldering industry risk, as stocks in this sector are subject to
sharp gyrations because of the cyclical nature of the semiconductor capital
equipment business.
This said, we still think the shares are attractive at $49.19. Why?
We believe the industry?s business cycle should remain strong at least
through 2000. Earnings estimates for Teradyne are being revised upwards.
Also the company?s projected earnings per share growth rate for 2000, 60%,
is approximately 50% faster than the sector?s rate as a whole.
Bottom Line:
In this market, investors who have paid a premium for growth have been
handsomely rewarded. With the wind at its back, and potential upside
surprises on the horizon, we believe Teradyne stock still has a way to run,
even at these lofty levels. |
