Teradyne IncTER104,98 $
Today we have an idea at the intersection of speculation and conservatism: take shares in semiconductor manufacturing equipment manufacturer Teradyne (NASDAQ: TO HAVE), to capitalize on the rebound of these stocks after a strong fall.
Growth potential and validity: 21% behind 18 months excluding dividends; 56,5% behind 5 years excluding dividends; 12% per annum during 14 years including dividends. All options take into account the effect of separating part of the company's business into separate issuers.
Why stocks can go up: because they are cheap, and the sector of the company is extremely promising.
How do we act: we take shares now by 106,99 $.
When creating the material, sources were used, inaccessible to users from the Russian Federation. We hope, Do you know, what to do.
No guarantees
Our reflections are based on the analysis of the company's business and the personal experience of our investors, but remember: not a fact, that the investment idea will work like this, as we expect. Everything, what we write, are forecasts and hypotheses, not a call to action. To rely on our reflections or not – it's up to you.
And what is there with the author's forecasts
Research, like this and this, talk about, that the accuracy of target price predictions is low. And that's ok: there are always too many surprises on the stock exchange and accurate forecasts are rarely realized. If the situation were reversed, then funds based on computer algorithms would show results better than people, but alas, they work worse.
So we're not trying to build complex models.. The profitability forecast in the article is the author's expectations. We specify this forecast for the landmark. As with the investment idea in general, readers decide for themselves, it is worth trusting the author and focusing on the forecast or not.
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Investment editorial office
What the company makes money on
TER makes test equipment for complex electronics. Most of the revenue 71% - it gives the sector of semiconductors, the rest is provided by industrial automation solutions, aerospace and consumer wireless electronics — 10, 13 and 6% respectively.
A year ago we published an investment idea for this company, and it details her business.
Arguments in favor of the company
Fell down. The company's recent report was better than expected., but showed some decline in revenue and profit due to logistical problems, exacerbated in the light of events in Eastern Europe. As a result, the shares fell sharply over these six months - from 168 to 106,99 $, - essentially approaching the level of the end 2020. But now Teradyne is still in better financial shape, than in December 2020, - so the degree of the stock's decline is excessive.
All the same perspective. Teradyne's outlook looks positive as semiconductor companies ramp up investment in capital renewal. Yes, and I would also expect growth from its “non-chip” segments.
Situation in the semiconductor industry, billion dollars
| 2018 | 2019 | 2020 | Forecast of 2021 | Forecast of 2022 | Forecast of 2023 | |
|---|---|---|---|---|---|---|
| Market size | 470,3 | 412,8 | 435,52 | 514,90 | 551,46 | 590,61 |
| Growth | 16,1% | −12,2% | 5,5% | 18,2% | 7,10% | 7,10% |
| Expenses for the renewal of fixed assets, percent of revenue | 22,6% | 24,8% | 25,1% | 24,01% | 24,01% | 24,01% |
| Upgrade costs | 106,1 | 102,5 | 109,1 | 123,6 | 132,4 | 141,8 |
| Growth in spending on the renewal of fixed assets | 11% | −3,4% | 6,4% | 13,3% | 7,1% | 7,1% |
Against the background. Comparing Teradyne to its competitors, then the words come to mind, spoken by our great contemporary poet Kanye West: "stronger, better, Faster, stronger". Teradyne looks more marginal compared to peers, and already this will allow us to hope for attracting the attention of investors to its shares.
Comparison of Teradyne with other companies, indicators for 5 years as a percentage of revenue
| R&D spending | General and administrative expenses | Final profit margin | |
|---|---|---|---|
| Teradyne | 14,08% | 17,64% | 17,27% |
| Advantest | 16,68% | 24,43% | 15,32% |
| Cohu | 12,93% | 20,38% | −0,89% |
| Chroma | 8,46% | 20,21% | 15,06% |
| National Instrument | 19,43% | 43,35% | 9,30% |
Activate. I think, that a strong drop in the stock could lead to the emergence of an activist investor among the shareholders of Teradyne, which may move its management towards one of the following options.
Option one. Increase dividends. The company is now paying 0,44 $ less per share per year 10% from her profit. Teradyne's annual dividend yield is 0,41%, that is very little. Given the profitability of this business, the amount of payments may well increase five times.
Option two. Split the company into different issuers. At a minimum, it can be divided into semiconductor and non-semiconductor divisions., and as a maximum, each of the divisions can be turned into a separate issuer. Not a fact, that it is feasible from the point of view of Teradyne as an enterprise, but such conversations will affect the quotes positively.
Option three. Sell the company. Its capitalization is 17.2 billion dollars - quite a feasible amount for any large manufacturer of integrated devices..
The most likely option is with dividends.: the company decides to throw a bone to investors, who are satisfied with "passive income", and they will temporarily unhook from the enterprise as a whole.
Clean accounting. More than enough money at the disposal of the company, to close all her debts - as long-term, as well as short term. In a time of rising rates and rising prices for loans, this is a big plus.
Trump up your sleeve. I'm very bad at the concept of buybacks by companies, but Teradyne made a ransom on not the worst terms. Over the past 7 years, she spent 2.859 billion dollars for these purposes, and the average price of a purchased share was about 42 $. So if she decides to expand and pays for most of the deal with her own shares, then in terms of the sustainability of her business, this will be a good deal.
What can get in the way
Concentration. In company 33% revenue comes from 5 unnamed largest customers, one of which gives 19%. A change in relationship with one of them can hit her accountability hard..
“Asia-s!» The main revenue of the company comes from the countries of Asia, which are closely integrated with each other economically.: Taiwan - 30%, China - 17%, South Korea - 11%. New strict quarantines in China could disrupt the company's operations in the region.
There are also risks of, that the Americans will ban the company from delivering to China or will put obstacles in this direction.
Price. P / S at the company 5, a P / E — 20,07. It's not crazy much., but the company does not look criminally undervalued.
What's the bottom line?
Shares can be taken now by 106,99 $. And then there are three options for the development of events:
- wait for stocks to return to level 129 $. Think, here it would be reasonable to count on 18 months of waiting;
- wait for quotes to return to the level 168 $. Here it is better to rely on 5 years of waiting;
- if the last time you took stocks with an eye on the long term, then you can buy them now.
Considering, that the rates are now rising and, respectively, investor expectations for passive income, it makes no sense to watch the news about the reduction in company payments. I do not think, that stocks will fall sharply, even if dividends are canceled completely.
Also, in all cases, we take into account the possibility of spinning off some divisions of Teradyne into separate issuers. If their stock goes up a lot, while the shares of the main Teradyne will tread the water, we will consider it a victory.
