Tuesday, October 23, 2007

Teradyne (NYSE:TER): Actionable Trading Call from Citigroup

Of today's analyst calls, I like Citigroup's Tim Arcuri's Teradyne (NYSE:TER) call the most. Tim and his cabal are upgrading TER to Buy from Hold and increasing tgt to $17 from $16 saying that while they have never loved this business and and they don’t expect orders to improve meaningfully before CQ1:08 at the earliest, checks suggest that - barring a significant decline in end demand - most test/assembly subcontractors (~50% of TER’s orders) are planning for a 5-10% Y/Y increase in capex in C2008 (as opposed to Citi model of -10% for the front-end). Given current order levels, they calculate this would require a ~40% increase in Qly orders over the coming Qs.

Work suggests back-end(test/assembly) orders per chip unit are now as low as any point in the past 15years with the exception of post-C2000 – and even then, back-end orders per unit were only slightly lower. It is noteworthy that TER has been up over the next 6 months every time in history that this metric has reached this type of trough level - the magnitude of which has varied from >100% to ~20% in recent years. Additionally, TER is now trading at ~1.5x EV/sales – a consistent trough level over the past 10 years – and it now has ~1/3 of the market cap supported by net cash.

The market appears concerned about a near-term acquisition (NEXT would make the most sense, on the surface), but the firm thinks valuation limits downside and they would view this a favorable structural development for the industry.

Notablecalls: Automated test equipment and backplanes assemblies is not a sexy business anymore. I'd go as far as to say it's a lousy business. It's the kind of a stock one has to buy with a leap of faith - by the time the turn in business is evident, the stock will be much higher than currently. The keyword here is valuation. With 1/3 of its mkt cap in cash, I'd say it's a relatively safe bet (barring stupid a acquisition).

Citi's call has it all: The valuation (at trough levels), The qualitative element (checks suggesting a pickup in capex and thus, orders), The chart (the stock looks oversold with high vol over the past week).

This should make a nice trading call here. Calling it Actionable. Don't overpay early on, though. After all, it's a NYSE stock.

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