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Teradyne Inc. Message Board

  • only_observing only_observing Aug 16, 2000 11:52 AM Flag

    Merrill expects PE expansion for TER

    Aug 16, 2000

    Teradyne (TER, $62 1/4,
    00E $3.10; 01E $4.00
    � Today, Teradyne announced
    that it will acquire two California based companies in
    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
    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
    higher valuations (35x 2001 estimates) versus Teradyne�s
    (15x 2001 estimates), we
    would expect further P/E
    expansion from Teradyne.
    (B. Hodess)

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    • Good question. If there was one universal
      calculation, all stocks would be fairly valued, which we know
      they are not.

      We do know this:

      1999 EPS
      = $1.07
      2000 EPS = $3.12
      2001 EPS =

      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
      Growth = 32%
      Current Industry P/E = 28.9
      Price Target = $98
      Current Price = $59

      As a sanity, try the same for AMAT:

      EPS =
      2001 Growth = 32% (fiscal estimate)
      Industry P/E = 28.9
      Fair Market Value =
      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.

      Folks, TER is
      being given away.

      • 2 Replies to only_observing
      • If MER is correct then we have the info to
        calculate a reasonable PE for TER.

        27% of business
        is contract mfg. with a PE of 35.

        2 to 4% is
        software which can have a PE of 50 to 100. Let's say 3% at
        a conservative 50 PE.

        That leaves 70%. Other
        Semis such as AMAT and KLAC are trading at about 22
        today. Let's conservatively choose 20.

        The PE for
        TER works out to be

        0.27x35 + 0.03x50 +
        0.70*20 =24.95

        Given the earnings for year 2001
        are $4.05, the current price for TER works out to be

        Given that the stock is at $61.75 now, we are trading
        at a 40% discount to fair value today.

      • 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.

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