2023-08-22 17:42:50 ET
Summary
- TTM Technologies reported a decline in net sales and income in Q2 2023, with lower-than-expected results in certain markets.
- The company is working to transform into a less cyclical and more differentiated business, with acquisitions and facility consolidation.
- TTM Technologies is focused on expanding its presence in the aerospace and defense market and expects growth in the data center market.
- It's a "Hold idea" - I stay away from buying until TTMI shows real signs that its reorganization is over.
The Company
TTM Technologies, Inc. ( TTMI ) is a $1.5-billion market cap company involved in the manufacturing and sale of a wide range of technology products. They operate in PCB and RF&S Components segments, offering a variety of technology products including custom assemblies, IC substrates, radar systems, and more. Their products cater to industries like aerospace, defense, data centers, and automotive.
In Q2 2023 , TTM Technologies reported a decline in net sales to $546.5 million from $625.6 million in Q2 2022 [-12.6% YoY]. The gross margin was 18%, slightly lower than the previous year [18.7%]. Operating income dropped to $21.4 million from $37.2 million. GAAP net income fell to $6.8 million compared to $27.8 million in Q2 2022, while non-GAAP net income amounted to $33 million. Non-GAAP earnings per diluted share were $0.32, beating the consensus figure by 60% .
Strong performance in the aerospace and defense, as well as data center computing markets, drove the overall top line during Q2. But the medical, industrial & instrumentation and automotive markets saw lower than expected results, the management said during the earnings call. That's why the consolidated sales figure dropped that low on a YoY basis.
As the management said, TTMI is working to transform into a less cyclical and more differentiated business. The acquisition of companies like Anaren and Telephonics expanded TTMI's offerings in highly engineered RF components, integrated electronic products, and surveillance and communications markets.
They are constructing a new, advanced PCB manufacturing facility in Malaysia, aiming to enhance supply chain resiliency and offer advanced multi-layer PCB sourcing options outside of China. TTMI is also consolidating its manufacturing footprint by closing small facilities to improve efficiency, operational performance, and profitability.
The aerospace and defense represented 47% of Q2 2023 sales with a backlog at $1.39 billion. TTMI is focusing on expanding its presence in this particular end-market to contribute more than 50% of its revenues in the future.
As you can see, the addressable market there will grow by 3-5% annually over the next few years. I checked with other third-party research agencies , and their data looks even more optimistic overall:
The company's recent acquisitions mentioned above definitely need some more time - their contribution to TTMI's growth today is minimal, as even in the IR presentation, the company calls FY2023 "A Year of Transition Positioning for Future Strength".
Now TTMI is planning to incur ~$25 million in costs associated with shutting down certain facilities, as we may learn from the Q&A session of the earnings call. Most of these costs are expected to occur during 2023. The revenue from these facilities is expected to be transitioned to other facilities, minimizing the impact, and once the transition is complete, an annual benefit of ~$25 million is anticipated.
The data center market, especially driven by AI-related designs, is showing promise with increased complexity in board designs and higher requirements. TTMI looks to be positioned well in this area with multiple customers and expects growth to spread into other cloud and data center performance requirements as the year progresses.
Time will tell how positively (or negatively) the aforementioned corporate developments will be reflected in FY2024, but so far we see some growth challenges. On a TTM-by-quarter basis , TTMI's net income is currently down 32%, and by the end of the year, analysts believe this decline is likely to worsen to negative 38%:
But how fairly is the company valued against the backdrop of these forecasts?
The Valuation
According to the Seeking Alpha Quant System, TTMI stock has a valuation score of "A-" because it is 40-70% undervalued in terms of most of its valuation multiples:
By historical standards, TTMI stock is also quite cheap with its TTM EV /EBITDA multiple, which is now well below its 10-year average. However, if we look at the forwarding multiple, the picture is different - there is an upcoming multiple expansion that will increase TTMI's valuation by about 20% next year due to a deterioration in its EBITDA.
TTM Technologies guided Q3 2023, projecting total revenue in the range of $550 million to $590 million and non-GAAP earnings per diluted share between $0.25 and $0.31. The company anticipates a sequential decline in EPS due to factors such as foreign exchange and operational challenges.
As it stands, TTMI isn't exactly cheap right now - perhaps it makes sense to stay away until the end of the year, when (and if) the firm proves that it is capable of overcoming its operational challenges. Or maybe it will happen sooner - if you're interested, you can put TTMI stock on your watchlist and monitor its quarterly results to catch the inflection point. However, I rate the stock a "Neutral/Hold" this time, as I don't think it has a sufficient margin of safety.
The Bottom Line
The company definitely has growth potential. In my opinion, however, investors should wait for more certainty about the corporate changes TTMI is currently undergoing, which are putting pressure on its margins.
The company's valuation doesn't look cheap due to the expected decline in earnings per share and EBITDA by the end of this year. More precisely, it will become cheap once there are signs that TTMI has moved past its restructuring phase and there are no longer barriers to profitable growth. Until that is the case, I prefer to stay aside.
Thanks for reading!
For further details see:
TTM Technologies: Waiting For A Turning Point