MSDW:tgt $125, 28x '01 EPS
8/18/00 Excerpts follow:
Company Description
Teradyne is the largest supplier of automatic test equipment
(ATE) for the semiconductor industry and a leading supplier
of non-semiconductor-related test systems for software,
telephone, and circuit board testing. The company is also a
leading merchant manufacturer of connection systems, such
as high-density backplanes and high-speed connectors.
Valuation
We rate TER Outperform. Our price target of $125 is based
on our belief that TER should trade at 28 times estimated
2001 EPS. Despite the bookings shortfall in the second
quarter (down 19% sequentially), we believe the
semiconductor cycle is intact and we expect booking to
increase sequentially through the remainder of 2000, at
least. However, in the near term, risk factors that could keep
TER from outperforming the market include: decelerating
year-over-year growth rates for semiconductor companies as
they begin to face tough comparisons, a seasonal slowdown
in the first quarter of 2001 (especially during Chinese New
Year). However, we believe tester orders will once again
reaccelerate in mid-2001.
In our view, TER is
suitable for investors with a tolerance for the price volatility
associated with technology stocks.
Key Investment Positives
· We believe the semiconductor cycle is firmly intact.
Front-end semiconductor fab capacity continues to run at
full throttle as chipmakers scramble to increase fab capacity.
As more capacity comes on line in the front-end, we believe
that a rising second wave of unit output will drive a re-acceleration
of bookings in the back end (which includes
test equipment). We believe these orders will materialize for
Teradyne in early-to-mid 2001.
· Leadership in communications-related chip ATE. While
lithography, deposition, or etch tools can be used to produce
many types of semiconductor devices, semiconductor test
equipment must be specific to the final device type.
Therefore, in examining the end markets that are growing
faster than historical averages, we can ascertain which types
of testers will most likely be in greatest demand. In the
current cycle, the connectivity revolution is driving demand
for communications-related products. These types of
products contain large portions of chips that combine both
analog and digital functionality (i.e., mixed-signal devices).
Teradyne dominates the mixed-signal tester market with
approximately 50% market share — nearly three times
greater than its nearest competitor. As the 800-pound
gorilla, we believe Teradyne is better positioned in this
semiconductor cycle than less mixed-signal centric
competitors.
· Large global infrastructure and R&D leadership.
Teradyne’s global infrastructure is the largest in the ATE
industry. It is very difficult for smaller companies to gain
critical mass and attain leading market shares in numerous
regions. In addition, our research indicates that Teradyne
spends more on R&D than any other ATE supplier. As
product cycles continue to shorten and the pace of
technology accelerates, Teradyne’s large R&D investment
strongly positions the company for future growth.
· Strong customer relationships. Once a test company gets
designed into a certain product cycle, it is difficult for a
competitor to overthrow the entrenched supplier.
· Highly cyclical semiconductor industry. Although the
semiconductor industry has grown at a CAGR in excess of
15% on average over the past twenty years, the industry is
highly cyclical with year-over-year growth rates ranging
from a positive 100%+ to a negative 30%. Mark Edelstone,
Morgan Stanley’s semiconductor analyst is forecasting 35–
40% growth this year with the current semiconductor cycle
lasting into 2002. |
