Teradyne, the global testing leader is undervalued


Teradine (“Wide Trench”) provides test equipment, including automated systems for semiconductors, system testing for hard disk drives, printed circuit boards and electronic systems, and remote testing of devices.

The company entered the industrial automation market in 2015, selling collaborative and autonomous robots for factory applications.

Teradyne directly and indirectly serves many end markets and geographies with its products, but its most significant exposure is in semiconductor testing.

A world leader in testing systems

Teradyne is a heavyweight in the supply of semiconductor automated test equipment, with market-leading capabilities spanning the entire wafer spectrum.

It is one of two companies in the world capable of producing the most advanced semiconductor testers, thanks to its hardware and software engineering skills.

The company is an important partner to chipmakers in the industry and has very strong relationships with them apple (“wide trench”) and Taiwan Semiconductor Industry Corporation (“Wide Trench”).

Teradyne’s market leadership translates into industry-leading margins, strong returns on invested capital, superior market share and justifies its Wide Moat competitive bulwark.

In addition to the top-tier capabilities, we believe Teradyne is a strong player.

The company appears to have found a good balance between investing in organic development and profitability, and is a good source of free cash flow despite its capital intensity.

We welcome the Company’s use of additional cash for shareholder returns and opportunistic mergers and acquisitions, which has recently focused on the high-growth industrial automation market.

Teradyne has a strong balance sheet, with a net cash position.

We expect Teradyne to complement continued investments in chip testing with investments in the high-growth robotics market.

We believe the company’s collaborative and autonomous bots will drive revenue growth over the next five years and be a margin accelerator.

In semiconductor testing, Teradyne will benefit from increasing complexity, particularly from expanding 3D NAND memory capacity and advancing to new architectures and smaller geometries in chips, such as flats. 3nm shapes and “universal-gate” transistor technologies.

We also expect to relocate industries to the US and expand capabilities to generate demand for automated testing equipment in the medium term.

We view Teradyne as a neutral bet in the global chip manufacturing market with moderate cyclicality resulting from its vital role in the supply chain for its customers.

High evaluation discount

We lowered our fair value gap estimate from $167 to $157 per share due to weak near-term guidance for test segments sold to non-semiconductor industries.

First quarter results were stronger than expected, driven by increased supply and demand in the semiconductor testing segment.

Conversely, the declines in wireless and systems tests now appear to be more severe than we previously expected.

We think Teradyne earnings will decline in 2023 and we’re seeing a big rebound in 2024 driven by chip test demand.

The administration has reiterated its target model for 2026, which includes double-digit annual average growth.

Investors will need patience going into 2023, but we reiterate our belief that the company’s stock is undervalued.

First-quarter sales were down 18% year-over-year and 16% sequentially to $618 million, with each end market declining.

Semi-trial sales were down 14% year-over-year and sequentially, which was below our expectations.

Teradyne increased supply to meet continued strong demand in the narrow industrial and automotive chip markets, and management also noted positive momentum in China.

The Systems Testing, Wireless Testing and Robotics (formerly Industrial Automation) segments experienced a double digit decline year-on-year due to slowing hard drives, weak mobile devices and weak global industrial demand.

Despite these challenges, profitability has already exceeded our expectations above consensus.

Gross margin rate of 57.7% increased 20 basis points sequentially despite lower sales due to higher auto and industrial mix in chip testing.

Teradyne said it was aiming for sequential sales growth and margin expansion in the second quarter, but lowered its full-year forecasts for the systems test, wireless test and robotics segments.

The weakness in these markets will be greater than expected, but we still believe a recovery is imminent in 2024.

The midpoint of second quarter sales of $655 million indicates sequential growth of 6% and decline of 22% year-over-year.

We expect to ship the first orders of 3nm systems from TSMC and Apple this year, with a much larger contribution in 2024.

Management also directed declines of 20-25% in wireless tests and systems in 2023, and single-digit growth for robotics.

To justify the current price, we believe a modest rebound should be expected in the company’s end markets, as total 2027 sales barely exceeded 2021 levels.

We should also assume operating margin pressure.

While Teradyne trades at a premium for testing and benchmarking its peers on a lower 2023 earnings outlook, we think the stock is cheap compared to our earnings growth projections over the next five years. Next years.

© Morningstar, 2023 – The information provided here is for educational purposes and is provided for informational purposes only. It is not intended and should not be considered as an invitation or encouragement to buy or sell listed securities. Any comment is the opinion of its author and should not be considered as a personal recommendation. The information contained in this document should not be the sole source for making an investment decision. Be sure to contact a financial advisor or financial expert before making any investment decisions.

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