After a powerful rally on the back of more money printing by the central banks, the valuations of many traditional safe-haven stocks (such as Nestl and Diageo) appear stretched. But one area in which there's still plenty of value is semiconductors. American-based Teradyne, which makes equipment for testing microchips for PCs, mobile phones and other computing applications, is a good example.
Last year, it acquired LitePoint Wireless for $580m, giving it direct exposure to the more profitable world of testing smartphones. As the latest handsets roll off assembly lines, customers such as Samsung now have even more tests to perform related to adding 4G transmitters and wi-fi capability, and this will create more demand for the firm's services.
Indeed, research firm IDC projects that in America alone, 4G adoption could soar by 87% a year through 2016, by which time there are expected to be 121 million subscribers across the country. This will create a gold mine for Teradyne, adding to the explosive growth the group has already enjoyed in the LitePoint division (20% of sales).
Subscribe to MoneyWeek
Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE
Sign up to Money Morning
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
Granted, the majority of the group is still tied to chip-testing for PCs and hard disk drives (67% sales), where of late growth has proceeded at snail's pace. However, this sluggishness will become far less important as sales ride the rushing tide of increased phone mobility.
Teradyne (NYSE: TER), rated a BUY by Piper Jaffray
Wall Street is predicting revenues and earnings per share (EPS) of $1.75bn and $1.77 respectively, rising to $1.88bn and $2.01 in 2013. That puts the stock on a price/earnings (p/e) ratio of 8.2. I would rate the stock on a seven times earnings before interest, taxes, depreciation and amortisation (EBITDA) multiple. Adjusted for net cash of $660m, a $78m pension deficit and contingent consideration of $55m, this generates a fair value of $20 per share.
In the short term, if the Chinese economy slows significantly, or if there's a major wobble in Europe that delays the rollout of 4G wireless technology, the firm could hit trouble. There are also foreign currency considerations for British investors. But these dangers are more than priced into the downtrodden valuation.
Summing up after the release of the numbers of the first half year, CEO Mike Bradley commented: "LitePoint delivered record orders and revenue as customers continue to embrace its advantages in the fast-moving mobility market."
Moreover, with "increasing device complexity and new wireless standards" each requiring higher bandwidth and computing power the firm should see greater demand for test equipment in the years ahead. Piper Jaffray has a price target of $26 per share, while its third quarter results are expected in mid-October.
Rating: BUY at $14.40
Paul Hill also writes a weekly share-tipping newsletter, Precision Guided Investments. See www.moneyweek.com/PGI, or phone 020-7633 3634 for more information.
-
Adidas, Nike or Jordans - could collectable trainers make you rich?The right pair of trainers can fetch six figures. Here's how you can start collecting vintage Adidas, Nike or Jordans now
-
Early bird ISA investors flock to global funds, India and the USThere’s been an increase in investors maxing out their ISA at the start of the new tax year. But where are they putting their cash and why does it make sense to be an early bird investor?
-
Somero: trading this overlooked bargainFeatures Mechanical-screed maker Somero dominates its niche and is attractively valued. Matthew Partridge picks the best way to trade it.
-
How to find big profits in small companiesCover Story The small- and micro-cap sectors are risky and volatile. But with careful research and patience, investors could make huge gains. Matthew Partridge explains how to find the market’s top tiddlers.
-
The hidden gems on Aim, London's junior marketFeatures Aim, London’s junior market, is risky – but you can find solid stocks at low prices. Scott Longley reports.
-
Is Aim finally coming of age?Features The Aim market of mostly smaller companies has traditionally been seen as a bit of a backwater. Is it time to change that view? Matthew Partridge talks to Paul Latham and Richard Power of fund management company Octopus.
-
Three Aim-listed firms that will thrive in a post-Brexit worldOpinion Matt Tonge and Victoria Stevens of the Liontrust UK Smaller Companies Fund pick three Aim-listed firms that will survive Brexit turmoil.
-
Fetch! The Chinese small-cap stocks to buy in the Year of the Dog
Opinion Each week, a professional investor tells us where she’d put her money. This week: Tiffany Hsiao of Matthews Asia selects three Chinese small-cap stocks with exciting potential.
-
Small and mid-cap stocks with big potential
Opinion Professional investor Guy Anderson of the Mercantile Investment Trust selects three small and medium-sized firms with promising prospects that the market has missed.
-
Get cheap, reliable growth from smaller companiesFeatures One of the most reliable long-term investment trends is the long-term outperformance of smaller companies over blue chips. Max King picks some of the best ways to buy into this growth.
