9/28 Smart Money Mag
Semiconductors is another industry well represented in our results. Of course, chip makers are famous for their profit-producing power. (Our screen devotees may remember that chip makers also dominated our last tech earnings screen.) But the caveat here is that we don't know whether chips' incredible run will soon slow. Some worry that Intel's sales shortfall could indicate the beginning of the end for highly valued semiconductor stocks — if not immediately, then in the next year or so.
With some trepidation, we zeroed in on Teradyne (TER) of the 11 chip stocks on our list. Based in Boston, Teradyne is the leading manufacturer of automated semiconductor-testing equipment, considered crucial to electronic-products manufacturers. The company is also gaining market share for logic-testers, specialized testing gear that figures to become more important as the so-called system-on-a-chip becomes more popular. But that doesn't mean it's immune to sales weakness reported elsewhere in the industry.
On the one hand, "They're right there in the sweet spot...where all the incremental investment is going toward," says Jack Geraghty, of Gerard Klauer Mattison. Increasing demand coupled with decreasing operating costs have helped increase the company's ROA to 22% from its historical 13% and its ROE to 30% from 17%. Comparing the historical figures with the present shows Teradyne's net profits growing faster than its equity.
But like most chip stocks, Teradyne's recent market performance has been dismal. The stock dropped 15% over two days last week. That's partly due to Intel's infamous warning, but may also reflect third-quarter problems all Teradyne's own. On Sept. 21, Prudential Securities analyst Shekhar Pramanick questioned whether Teradyne would hit its third-quarter orders target of $850 million to $900 million. Geraghty says he also has his doubts for the quarter, which ends Friday. But this bullish analyst says the only real issue is whether Teradyne collects the money this week or next.
But "this week or next" is extremely important to its short-term market performance. And the later the warnings come, the more disastrous they can be for a stock. Thanks to Intel, Priceline and others, you've already seen what a warning can do. Intel fell 22% on Friday, the day after its warning, while Priceline lost 45% of its market value Wednesday.
Warning season isn't over yet. The smart bet on Teradyne would be to wait on the sidelines for this sales issue to clear up. If, in a week or two, the coast looks clear, Teradyne's increasing efficiency makes it an attractive bet. After all, if you can't have hypergrowth, we think efficiency growth is the next best thing.
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