Tuesday, September 15, 2009

Teradyne (NYSE:TER): Upgraded at Oppenheimer

Oppenheimer's semi team is at its best again, this time upgrading shares of Teradyne (NYSE:TER) to Outperform from Perform:

We are upgrading TER to Outperform and raising our PT to $13 based on general tightness in semi test, sufficient wafer bank inventory buffering it from foundry wafer starts, and specific to TER, 1) a salient win for single-chip basebands at QCOM and 2) visibility for volume orders in Q4 for BRCM's ramp. In winning at QCOM, TER delivers a gut-punch to competitor VRGY and walks away with a 15-20 unit UltraFLEX order ($30-$40M) from QCOM near term and ~5% pts of share gain longer term. Combined with unprecedented cost cutting, TER is now ripped, with big muscles underpinning mid-cycle EPS of $1.00 in 2010.

Upon arriving in Asia, it's clear TER is rife with positive catalysts: 1) a key decision by QCOM to switch from VRGY's 93K to TER's UltraFLEX tester for its single-chip baseband; 2) visibility for volume orders in Q4 to support BRCM's ramp, and 3) positive revision to order forecasts for Q1:10 by IFX, QCOM, and MCHP

Near term, checks indicate QCOM has placed a 15-20 unit UltraFLEX (with UltraWave 12G cards) order to support this platform change; we estimate partial rev recognition in Q3 will underpin rev/EPS upside, relative to stated guidance for $190-$205M, ($0.02)-$0.02. Thus, we are raising our Q3 rev/EPS to $210M/$0.04.

Longer term, we estimate the QCOM win could net TER ~5% pts of share gain. Assuming the SOC test buy rate re-normalizes to 1% (implying a ~$2B market), and TER gleans ~45% share, we calculate TER's qtrly mid-cycle rev run-rate at ~$300M. At a 15% operating margin, this equates to $0.85 in EPS.

In this light, our EPS model for $0.57 in 2010 is conservative, yet every time TER makes the initial ascent to nominally $1.00 in EPS power, the stock discounts this ahead by ~6 months and trades to $13-$15. Arguably, this time, the tailwinds for TER are finally much stronger—even without DDR3 test.

Action: Gary Hsueh and Wenge Yang from Oppenheimer do it again! They were the first to break the news on NANO winning at Intel (check the archives) and the stock did 100%+ in less than a month in response. Now they are making a very strong call on TER.

TER is not that forgotten stock as NANO and it won't do 100% in a month, but I still expect win at QCOM win over VRGY to drive the stock higher near-term. I suspect we will see $9 as soon as today with $9.50 not out of the question later this week.

More aggressive accounts might want to consider VRGY as a short due to the share loss at QCOM.

Kudos guys, great work!

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