The past six months have been a windfall for Teradyne’s shareholders. The company’s stock price has jumped 121%, hitting $190.68 per share. This was partly thanks to its solid quarterly results, and the performance may have investors wondering how to approach the situation.
Is now the time to buy Teradyne, or should you be careful about including it in your portfolio? See what our analysts have to say in our full research report, it’s free for active Edge members.
Why Is Teradyne Not Exciting?
We’re happy investors have made money, but we're cautious about Teradyne. Here are three reasons there are better opportunities than TER and a stock we'd rather own.
1. Revenue Spiraling Downwards
A company’s long-term performance is an indicator of its overall quality. Any business can experience short-term success, but top-performing ones enjoy sustained growth for years. Teradyne struggled to consistently generate demand over the last five years as its sales dropped at a 1.1% annual rate. This was below our standards and signals it’s a lower quality business. Semiconductors are a cyclical industry, and long-term investors should be prepared for periods of high growth followed by periods of revenue contractions.
2. Shrinking Operating Margin
Operating margin is a key measure of profitability. Think of it as net income - the bottom line - excluding the impact of taxes and interest on debt, which are less connected to business fundamentals.
Analyzing the trend in its profitability, Teradyne’s operating margin decreased by 15.1 percentage points over the last five years. Even though its historical margin was healthy, shareholders will want to see Teradyne become more profitable in the future. Its operating margin for the trailing 12 months was 17.8%.
3. EPS Trending Down
Analyzing the long-term change in earnings per share (EPS) shows whether a company's incremental sales were profitable – for example, revenue could be inflated through excessive spending on advertising and promotions.
Sadly for Teradyne, its EPS declined by 6.6% annually over the last five years, more than its revenue. This tells us the company struggled because its fixed cost base made it difficult to adjust to shrinking demand.
Final Judgment
Teradyne isn’t a terrible business, but it doesn’t pass our quality test. After the recent surge, the stock trades at 38.3× forward P/E (or $190.68 per share). While this valuation is reasonable, we don’t really see a big opportunity at the moment. We're pretty confident there are superior stocks to buy right now. Let us point you toward our favorite semiconductor picks and shovels play.
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