Semiconductor Equipment & Materials company Teradyne is taking Wall Street by surprise today, falling to $104.15 and marking a 0.87% change compared to the S&P 500, which moved -1.39%. TER is -7.15% below its average analyst target price of $112.17, which implies there is more upside for the stock.
As such, the average analyst rates it at buy. Over the last year, shares of Teradyne have offered a similar return to the S&P 500, moving -7.18%.
Teradyne, Inc. is an American automatic test equipment (ATE) designer and manufacturer based in North Reading, Massachusetts. The company is part of the industrials sector, which is considered cyclical. This means that sales revenues, and to some extent share prices, tend to increase during economic booms and then fall back to earth during busts. However, industrial companies can dampen this cyclical effect if they are invovled in multiple industries.
Teradyne's trailing 12 month P/E ratio is 26, based on its trailing EPS of $4.22. The company has a forward P/E ratio of according to its forward EPS of $5.17 -- which is an estimate of what its earnings will look like in the next quarter. As of the first quarter of 2023, the average Price to Earnings (P/E) ratio for US industrials companies is 20.49, and the S&P 500 has an average of 15.97. The P/E ratio consists in the stock's share price divided by its earnings per share (EPS), representing how much investors are willing to spend for each dollar of the company's earnings. Earnings are the company's revenues minus the cost of goods sold, overhead, and taxes.
To better understand TER’s valuation, we can divide its price to earnings ratio by its projected five-year growth rate, which gives us its price to earnings, or PEG ratio. Considering the P/E ratio in the context of growth is important, because many companies that are undervalued in terms of earnings are actually overvalued in terms of growth.
Teradyne’s PEG is 2.481, which indicates that the company is overvalued compared to its growth prospects. Bear in mind that PEG ratios have limits to their relevance, since they are based on future growth estimates that may not turn out as expected.
To understand a company's long term business prospects, we must consider its gross profit margins, which is the ratio of its gross profits to its revenues. A wider gross profit margin indicates that a company may have a competitive advantage, as it is free to keep its product prices high relative to their cost. After looking at its annual reports, we obtained the following information on TER's margins:
| Date Reported | Revenue (k) | Cost of Revenue (k) | Gross Margin | YoY Growth |
|---|---|---|---|---|
| 2022-12-31 | $3,155,045 | $1,287,894 | 59.18% | -0.69% |
| 2021-12-31 | $3,702,881 | $1,496,225 | 59.59% | 4.16% |
| 2020-12-31 | $3,121,469 | $1,335,728 | 57.21% | -2.0% |
| 2019-12-31 | $2,294,965 | $955,136 | 58.38% | 0.5% |
| 2018-12-31 | $2,100,802 | $880,408 | 58.09% | n/a |
- Average gross margin: 58.49 %
- Average gross margin growth rate: 0.39 %
- Coefficient of variability (higher numbers indicating more instability): 2 %
Teradyne's gross margins indicate that its underlying business is viable, and that the stock is potentially worthy for investment -- as opposed to speculative -- purposes.
To deepen our understanding of the company's finances, we should study the effect of its depreciation and capital expenditures on the company's bottom line. We can see the effect of these additional factors in Teradyne's free cash flow, which was $414,674,000.00 as of its most recent annual report. This represents the amount of money that is available for reinvesting in the business, or for paying out to investors in the form of a dividend. With its strong cash flows, TER is in a position to do either -- which can encourage more investors to place their capital in the company. Over the last four years, the company's free cash flow has been growing at a rate of 12.13% and has on average been $574,227,200.00.
Another valuation metric for analyzing a stock is its Price to Book (P/B) Ratio, which consists in its share price divided by its book value per share. The book value refers to the present liquidation value of the company, as if it sold all of its assets and paid off all debts). Teradyne's P/B ratio is 6.51 -- in other words, the market value of the company exceeds its book value by a factor of more than 6, so the company's assets may be overvalued compared to the average P/B ratio of the Industrials sector, which stands at 3.78 as of the first quarter of 2023.
Teradyne is likely fairly valued at today's prices because it has an inflated P/E ratio, an elevated P/B ratio, and a steady stream of positive cash flows with an upwards trend. The stock has strong growth indicators because of its consistent operating margins with a stable trend, and strong earnings, and significant re-investment in the business. We hope this preliminary analysis will encourage you to do your own research into TER's fundamental values -- especially their trends over the last few years, which provide the clearest picture of the company's valuation.
| 2019-12-31 | 2020-12-31 | 2021-12-31 | 2022-12-31 | |
|---|---|---|---|---|
| Revenue (MM) | $2,295 | $3,121 | $3,703 | $3,155 |
| Revenue Growth | n/a | 36.01% | 18.63% | -14.79% |
| Gross Margins | 58.38% | 57.21% | 59.59% | 59.18% |
| Gross Margins Growth | n/a | -2.0% | 4.16% | -0.69% |
| Operating Margins | 24.12% | 29.74% | 32.43% | 26.37% |
| Operating Margins Growth | n/a | 23.3% | 9.05% | -18.69% |
| Earnings Per Share | $2.81 | $4.72 | $6.25 | $4.59 |
| EPS Growth | n/a | 67.97% | 32.42% | -26.56% |
| Diluted Shares (MM) | 166 | 166 | 162 | 156 |
| Free Cash Flow (MM) | $444 | $684 | $966 | $415 |
| FCF Growth | n/a | 54.01% | 41.22% | -57.07% |
| Capital Expenditures (MM) | $135 | $185 | $132 | $163 |
| Net Debt / EBITDA | -0.61 | -0.47 | -0.82 | -0.85 |
