Thursday, November 01, 2007

Teradyne (NYSE:TER): Positive Signs Emerging For Test in 2008

- Citigroup was out positive on Teradyne (NYSE:TER) yesterday afternoon noting that as part of its CQ3 earnings report, ASE (the top outsourced test/assembly vendor) revised C2007 capex up slightly and indicated capex/sales would likely increase in 08 from the 13% level in 07.

Given ASE's expectation for C2008 revenue growth in the 15-20% range, this implies capex will grow even faster than this rate in 08.

It is further worth noting that, according to SEMI data, the mix between assembly and test spending across the entire chip industry was more skewed toward assembly and away from test in '07 than any year in history with test down to ~67.5% of the total back-end mix - fully ~400bps below the long-term average. Therefore, even a reversion back to a more normalized spending mix would be positive for test capex in 08.

While this is just from one OSAT (Outsourced Assembly and Test vendor), they note it is the largest and the directional correlation among OSATs is often high. Combined with valuation that is at trough, this lends support to Citi's bullish call on TER and the firm reiterates Buy rating on the stock.

Notablecalls: I highlighted Citi's upgrade on TER on Oct 23, calling it an Actionable Trading Call. The stock made a nice upward move that day but has subsequently given back all of the gain and then some. In light of Citi's comments, I don't see this as justified. I think TER makes a nice swing long right here with a leash just under recent lows.

Technically, the stock has held above the $12 low for several days, suggesting that at least a s-t term bottom may be in.

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