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Teradyne’s momentum may translate to strong full-year results

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Outlook positive for 2014

In the previous parts of this series, we discussed the growth trajectory for the semiconductor manufacturing industry. We saw Teradyne’s (TER) take on the future for the automatic test industry. In this part, we’ll discuss how the trends described earlier translate into numbers.

Teradyne (TER) is set to deliver 15% year-over-year growth in sales to $1.6 billion in 2014. This growth is driven by share gains in the SoC (system-on-chip) and memory test markets. Teradyne’s gross margin is expected to slide by 2% to 54% due to the product mix.

Teradyne’s operating income is expected to grow by 23% in dollar value to $313 million. It’s expected to increase by 1% year-over-year to 19% on account of prudent expense management.

Its non-GAAP (non-generally accepted accounting principles) diluted earnings per share is projected to increase by 13.2% to $1.20 in 2014. These gains in sales and profits are from the strengthening semiconductor test business.

ETFs such as the iShares PHLX Semiconductor ETF (SOXX) have a high weighting for Teradyne (TER). Investors can benefit if Teradyne’s growth trajectory turns out as expected.

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Teradyne’s cash flow generation is likely to remain healthy

Teradyne (TER) is projecting operating cash flows of $405 million. This should more than cover its annual capex (capital expenditures) of $170 million, leaving the company with free cash flow of $235 million.

Up to the third quarter, Teradyne’s (TER) cash flow has paid for the settlement of $190 million in convertible debt and $24 million in dividends.

This is the first time the company has distributed dividends to its shareholders. In line with the previous two quarters, the company declared a quarterly dividend of $0.06 per share in December. This brings the total dividend tally for the year to $38 million.

Teradyne should be able to address the additional dividend payment if it goes on to generate the forecasted free cash flow.

In the next part, we’ll value Teradyne against its closest peers, Advantest Corporation (ATE), Xcerra Corporation (XCRA), Agilent Technologies (A), and National Instruments (NATI).

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