2023-11-30 01:36:14 ET
Summary
- TTM Technologies stock was down big as recently as late October, but a rebound in November has narrowed down losses for the year to close to break even.
- The Company has a number of attributes, including trading at just below book value, which may draw the interest of those looking for value.
- A look back at past performance shows that the stock has all sorts of problems holding on to gains, resulting in a stock going in circles.
- Long TTMI is worth considering, but probably only under specific circumstances and then only for a short while.
TTM Technologies ( TTMI ), a manufacturer of printed circuit boards, soared higher in November with a gain of 26.8%. On the other hand, it's worth noting that the recent gains have only narrowed down the YTD losses because the stock is still down 3.4% for the year. In other words, TTMI has not done all that well in spite of the big gains in recent weeks. Furthermore, going back further in time shows how the stock has struggled holding on to gains with mostly sideways action in recent years, something not likely to be all that appetizing to prospective buyers. However, there may still be reasons why TTMI is worth a look. Why? Will be covered next.
Long TTMI has not really delivered
A past article from January 2021 rated TTMI a buy for a number of reasons, including relatively low valuations. However, while TTMI did manage to go on temporary runs as shown in the chart below, the stock had a hard time keeping it going, resulting in a stock that has basically gone in circles for the last few years. The stock, for instance, was valued at $14.17 when the article was written in January 2021 and the stock closed at $14.57 almost three years later on November 28, 2023. The result is bulls not having much to show for the last three years or so.
The chart below shows how the stock's struggles have continued in the last 12 months. Still, TTMI has traded within a fairly wide range. The 52-week high of $17.46 was set in January and the 52-week low of $11.13 was reached in May. Note how the stock rebounded in October after hitting a low of $11.14, $0.01 above the 52-week low of $11.13 hit months earlier, which was also followed by a rebound. Note also how the stock is now in the $14.50-15.50 region, which is where the stock peaked back in August. That one was followed by a decline, which may happen again now that the stock has reached the $14.50-15.50 region.
TTMI was down 26.2% for the year as recently as October 25, but a powerful rally in the last five weeks or so has narrowed losses to just 3.4% YTD. Most of these gains occurred from November 1 through November 3, which includes a gain of 12.5% on November 1. This did not happen by accident because November 1 was when TTMI released its most recent earnings report.
What the market liked about the Q3 FY2023 report
TTMI beat estimates for the top and the bottom line in its Q3 report. The consensus called for non-GAAP EPS of $0.28 on revenue of $570.5M, but TTMI reported non-GAAP EPS of $0.43, or $0.15 more than expected, on revenue of $572.6M. On the other hand, TTMI reported a loss of $37.1M or $0.36 per share in terms of GAAP.
The GAAP loss was the result of an impairment charge to the tune of $44M, which was in turn a direct consequence of weak demand from telecom equipment providers in the wireless infrastructure market. Adjusted EBITDA was $84.08M in Q3 FY2023, up from $74.72M in Q2 FY2023, but down from $102.53M in Q3 FY2022. TTMI finished with debt of $864.8M, partially offset by cash, cash equivalents and restricted cash of $408.3M on the balance sheet. The table below shows the numbers for Q3 FY2023.
(Unit: $1000, except for EPS) | |||||
(GAAP) | Q3 FY2023 | Q2 FY2023 | Q3 FY2022 | QoQ | YoY |
Net sales | 572,582 | 546,509 | 671,080 | 4.77% | (14.68%) |
Gross margin | 19.8% | 18.0% | 19.2% | 180bps | 60bps |
Operating margin | (1.8%) | 3.9% | 7.4% | (570bps) | (920bps) |
Operating income (loss) | (10,202) | 21,408 | 49,778 | - | - |
Net income (loss) | (37,066) | 6,824 | 43,528 | - | - |
EPS | (0.36) | 0.07 | 0.42 | - | - |
(Non-GAAP) | |||||
Net sales | 572,582 | 546,509 | 671,080 | 4.77% | (14.68%) |
Gross margin | 20.8% | 19.2% | 19.7% | 160bps | 110bps |
Operating margin | 10.1% | 8.4% | 10.2% | 170bps | (10bps) |
Operating income | 57,891 | 46,090 | 68,212 | 25.60% | (15.13%) |
Net income | 44,882 | 33,044 | 57,916 | 35.83% | (22.51%) |
EPS | 0.43 | 0.32 | 0.56 | 34.38% | (23.21%) |
Source: TTMI Form 8-K
However, the outlook was more muted. Guidance calls for Q4 FY2023 revenue of $550-590M, a decline of 7.7% YoY at the midpoint. The forecast calls for non-GAAP EPS of $0.34-0.40, decline of 9.8% at the midpoint. With the latest guidance, TTMI is projected to end FY2023 with non-GAAP EPS of $1.30 on revenue of $2,233.5M. In comparison, TTMI earned $1.74 on revenue of $2,495.0M in FY2022.
Q4 FY2023 (guidance) | Q4 FY2022 | YoY (midpoint) | |
Revenue | $550-590M | $617.2M | (7.65%) |
Non-GAAP EPS | $0.34-0.40 | $0.41 | (9.76%) |
Source: TTMI Form 8-K
Management added some color to guidance. While some market segments are doing okay, others are dealing with weak demand. From the Q3 earnings call:
"As we look into Q4, we are seeing our commercial markets somewhat mixed with year-on-year growth in data center computing, driven by momentum related to artificial intelligence advancements and sequential growth in the automotive market, stabilization in medical, industrial, and instrumentation with continued weakness in networking."
A transcript of the Q3 FY2023 earnings call can be found here .
Why TTMI looks appealing in some aspects
TTMI has seen sales and profits decline in 2023 and the stock has lost ground in 2023, although by a relatively modest amount. The stock has essentially gone in circles in recent years. Guidance was mixed at best. Nevertheless, TTMI may still draw interest since TTMI is not without its pros. For instance, TTMI has a book value of $1,501.1M with total assets of $3,266.5M and total liabilities of $1,765.4M.
This converts to a book value of about $14.68 per share with 102.23M shares outstanding, which means TTMI is trading slightly below book value with a stock price of $14.57. Some might argue TTMI is therefore undervalued with the stock valued at less than book value. In addition, the table below shows how multiples for TTMI tend to be significantly lower than many in the sector.
TTMI | Sector median | |
Market cap | $1.49B | - |
Enterprise value | $2.05B | - |
Revenue ("ttm") | $2,280.7M | - |
EBITDA | $266.6M | - |
Trailing non-GAAP P/E | 10.91 | 19.61 |
Forward non-GAAP P/E | 11.36 | 22.61 |
Trailing GAAP P/E | N/A | 25.67 |
Forward GAAP P/E | N/A | 26.73 |
PEG GAAP | N/A | 0.95 |
P/S | 0.66 | 2.66 |
P/B | 1.00 | 2.75 |
EV/sales | 0.90 | 2.69 |
Trailing EV/EBITDA | 7.71 | 15.28 |
Forward EV/EBITDA | 6.58 | 14.60 |
Source: Seeking Alpha
TTMI may be trading below fair value
A major reason why the stock has not done great is that growth has been rather difficult to come by for TTMI. However, TTMI has started a number of initiatives designed to give growth a boost, which were presented in greater detail at the most recent Analyst Day . For instance, TTMI has made acquisitions to increase addressable market.
TTMI is now more exposed to the defense sector, which should make TTMI less vulnerable to the ups and downs of the business cycle since defense spending tends to be more stable than say consumer spending. TTMI is focusing on market segments that have the potential to grow faster in the coming years like, for example, the automotive segment.
The general expectation is that TTMI will have a better 2024 than 2023, especially with semiconductor demand expected to return to growth in 2024. Estimates put FY2024 revenue in the $2.33-2.44B range. Keep in mind though that industry forecasts have turned out to be too optimistic in 2023, at least recently, with demand weaker than expected.
If we nonetheless assume FY2024 revenue comes in near the high end of estimates or around $2.43B and TTMI grows at a CAGR close to the last five years or about 2.9-3.0%, then annual revenue would hit $2.82B five years later. This would increase free cash flow from around $120M to $173M during this time period.
If we apply a discount rate of an estimated 8.6%, then according to the discounted cash flow method fair value for TTMI is around $18.75, well above the current stock price of $14.57. While some may argue the above projections are too optimistic, keep in mind that alternative methods for fair value suggest even higher values. For instance, according to Peter Lynch, if we assume earnings grow at a CAGR similar to the last three years or 15.48% on average per year, then that would put fair value around $20.75 with TTM EPS of $1.34. Either way, both methods suggest the current stock value is too low.
Investor takeaways
TTMI is a stock with a number of appealing attributes. For instance, TTMI comes with low valuations. The stock is currently below book value. This and other multiples are well below what other stocks go for. While fair value is subjective, more than one method suggests TTMI is trading well below fair value.
While growth could be better, TTMI has a solid track record when it comes to earning a profit. Of the ten years in FY2013-2022, only one ended in the red in terms of GAAP. It may be too early to tell, but it is possible TTMI could grow faster than it has in recent years if some or all of the initiatives TTMI has worked on start to bear fruit.
On the other hand, while TTMI has its pros, it also has its cons. There is no denying the stock has not made much headway in recent years. The stock has gone up and down, but it has been essentially sideways all these years. If the goal is to earn a solid return on a stock, then long TTMI has not been all that rewarding. Unless of course, one was able to get in at the lows and get out at the highs, something very few can do consistently.
It's also worth mentioning that TTMI may be close to resistance. The stock is currently close to a price region that it was unable to breach back in August, even though it spent the entire month trying unsuccessfully. If the stock has a path higher cut-off, then the path of least resistance is for the stock to head lower, especially after the major run it had in November.
So while the stock has had a good run recently and there is a case to be made for long TTMI, I am nonetheless going with neutral on TTMI. TTMI has a shot at doing much better than it has recently, which could allow for the stock to break out of the range it's been in for the last several years. Keep in mind though the stock has not gone anywhere in recent years and there is nothing to prevent this from happening again. Past performance is not indicative of future results, but a prior track record says not to get your hopes too high when placing bets on TTMI.
Long TTMI makes more sense as a short-term speculative play than a buy-and-hold. If, for instance, the stock falls far below book value, more than is the case right now, something that has happened from time to time, including as recently as last October. If the stock gets there once more, TTMI could be worth a shot as a short-term play with an eye toward a bounce back above book value. However, as of right now, the sideways action from TTMI is just not that appealing, especially when better returns can be found elsewhere.
For further details see:
TTM Technologies: The Case For And Against