Teradyne (TER, $62 1/4, D-1-1-9) 00E $3.10; 01E $4.00 � Today, Teradyne announced that it will acquire two California based companies in the printed circuit board industry. Herco Technology (San Diego) manufactures printed circuit boards and Synthane Taylor (La Verne, CA) supplies PCB laminates and is a major supplier to Herco. � We view these acquisitions as positive for the company. The contract manufacturing business is 27% of Teradyne�s revenues and growing at a compound annual rate of 60%. We estimate operating margins of this business to be in the range of 16-18%, higher than comparables like Solectron, Flextronics, or Sanmina. As these companies are trading at higher valuations (35x 2001 estimates) versus Teradyne�s (15x 2001 estimates), we would expect further P/E expansion from Teradyne. (B. Hodess)
A trailing P/E in a cyclical sector is NOT representative of stock valuation. TER will make 300% more this year than last, and 30% more next year over this. Certainly you would be willing to pay more for a stock growing @ 30% than one growing @ 10%. When I buy a stock I'm betting the stock will appreciate based on future business execution and resultant growth, otherwise known as investing.
Therefore, IMHO, I offer the following as a reasonable yardstick for valuation. Looking out one year (June 2001):
EPS = $3.40 2001 Growth = 32% Current Industry P/E = 28.9 (Yahoo) Price Target = $98 Current Price = $59 13/16
As a sanity, try the same for AMAT:
EPS = $3.00 2001 Growth = 32% (fiscal estimate) Current Industry P/E = 28.9 Fair Market Value = $86.70 Current Price = $80 15/16
Some analysts are hanging a $120 price target on AMAT. You be your own judge. Best regards.
If 27% of TER's business is contract manufacturing and this business should be valued at 35 times 2001 earnings (to match Solectron, Flextronics or Sanmina even though TER's margins are greater), then we arrive at some interesting conclusions.
If we value the contract mfg. business at 35 times next year's earnings, then the rest of TER's businesses are being valued at 7.6 x 2001 earnings (to come up with an overall 2001 PE of 15).
This is ridiculously low for a leader in the ATE field.
You are dead right. Another way to look at it: Connection Systems is approaching $1B in sales. Entire company sales last year were $1.8B. Semi equipment analysts who follow TER just don't get it. If Co. were to split in two, think what the two pieces would be worth to shareholders.