ML:Business Outlook Continues to be Positive. Q4 could be very bright
Excerpts from Merrill Lynch, 9/11/00 follows:
Investment Highlights:
• We visited Teradyne for a business update late
last week. We remain very comfortable with
our estimates for the quarter of $0.83 on
revenue of $850 million. We believe that
orders for the quarter will be slightly up Q/Q.
• The recent lumpiness in Teradyne’s tester
orders appears to have been caused by
subcontract test vendors that accelerated
orders in the first quarter in an attempt to win
mixed-signal (communications) test business
from major fabless and IDM customers.
• Memory is clearly showing a rebound and
Teradyne is well positioned in that market,
with three of the top DRAM manufacturers as
customers.
• We maintain our Buy Rating and $110 price
objective.
Fundamental Highlights:
• Teradyne is the leading manufacturer of
automatic test equipment (ATE) serving the
electronics industry. The main product lines
include semiconductor, circuit board, and
telecom infrastructure test equipment, and
software testing. Teradyne is also a leading
Electronics Contract Manufacturer.
We stopped by Teradyne to get an update on the current
business trends and better understand why the recent
quarter’s drop in new orders occurred.
Recent drop in orders not due to competition, order
expansion should begin to accelerate in fourth quarter
Teradyne continues to be the leader in mixed-signal and logic
testing. We believe the recent quarter’s drop in orders was due
to over ordering of Catalyst testers by subcontract tester
vendors in Taiwan and Singapore, not competitive losses. We
knew that Teradyne had received a large number of orders for
Catalyst testers in the closing days of the first quarter. We
believe that a number of the subcontract test houses (Amkor,
ASE, STATS) were actively competing to win outsourcing and
fabless communications test business. By purchasing a large
number of Catalyst testers, they could demonstrate the needed
capacity to win this business. Catalyst is clearly the favorite
high end system on a chip tester for wireless and wireline
communications IC companies. We believe that these test
house customers were competing for the same business, thus
some redundant capacity was put in place causing a 1-2 slower
order rate for the hot Catalyst. The recent acknowledgement of
cellular handsets forecast also had some impact on utilization of
these systems. We estimate that the over capacity will be
worked off by the fourth quarter of this year when order growth
should be more robust.
As a matter of fact, we believe that Teradyne has
continued to gain share. Teradyne has successfully
become the sole supplier of mixed-signal testers to
Motorola, is winning a majority of new business at TI, and
may gain more share at a major European customer.
New products mean trouble for competitors
Demand for the new higher-end mixed-signal tester, Tiger,
is high. Teradyne currently has more demand than
manufacturing capacity. One European customer alone
attempted to place an order for 20 Tigers. The Silicon
Germanium based system provides 1024 digital pins and
1.6 Gbps data rates with integrated real time analog
instruments. It is target at the market for SOC devices in
disk drive, network switching, PC chip set, and advanced
graphic applications. The company is working on its next
mixed-signal tool, code named Panther, to target the
lower-end market, currently dominated by Credence. To
capture higher share in the red-hot flash memory market,
the FLASH 750 was announced in July. It features a new
architecture to reduce the cost of test for flash memory.
The new system is the first flash memory tester with the
capability of testing 32 devices in parallel for cell phone
NOR flash devices.
Fourth quarter could be very bright.
Along with over capacity of mixed-signal testers being
worked off, the fourth quarter could be very bright for
Teradyne as DRAM customers have recently picked up
quote activity. A number of other sources tell us all major
DRAM manufacturers are approaching equipment makers
about reserving manufacturing slots for early next year.
We believe Teradyne is well positioned behind Advantest,
the leading company in memory test. Advantest
highlighted its strength by revising up its parent and
consolidated forecasts on September 7. It took FY3/01
consolidated sales and RP from ¥235bn and ¥60bn to
¥260bn and ¥75.5bn, respectively. We believe that
Teradyne has large market share at IBM and Micron
Technology and is strong at Hyundai while it battles it out
with Advantest at Samsung for top share.
Connector-Backplane business continues to rock
The company recently acquired two smaller companies to
expand capacity and announced a new plant. Eventually,
Teradyne will expand into connectors and backplanes for
optical switching market as well as purely electronics.
Investment Opinion
Maintain BUY and price objective of $110.
We believe the stock should regain a valuation in-line with
Applied Materials and KLA-Tencor as the leaders in their
respective segments at 25-30x 2001 EPS estimates. Thus,
our price target is $110, based on our 2001 estimate of
$4.00. We note that we believe our valuation analysis is
very conservative. We estimate that 20% of our $4.00 EPS
will come from contract manufacturing (Connection
Systems) were the closest comparable is Sanmina. If we
value this portion of the EPS at 50x like Sanmina, that
yields a $40 price. The remaining $3.20 even at only 20x
2001, yields $64. Thus, the sum of the parts valuation is
$104. This is nearly our price target even with a very low
P/E on the semiconductor equipment portion. Lastly, the
management is showing its desire to unlock shareholder
value. The proactive change in structure for the software
testing unit should allow the hidden value of this unit to be
discovered. |
