Can TTM Technologies Turn Into a High Profitable Growth Company?
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Highlights:
- Growing US defense spending boosts core segment revenue
- Strategic divestments to drive future profitability
- China poised to win 5G race, providing a growth catalyst
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TTM Technologies’ revenue breakdown 2020
Price turned bullish, signal stays neutral
- Recently, the 50 DMA has crossed the 200DMA, which is a good sign
- If the 50DMA were to continue that upward trend, it could turn into a bullish signal
- Throughout the past year, Volume RSI has mainly stayed below the 50%-line
- So, volume is not a support yet for a bullish rally
Growing US defense spending boosts core segment revenue
- TTM’s recent focus on the fast-growing aerospace & defense segment has paid off
- In 2020, the segment contributed 37% of total revenue, compared to 16% in 2014
- The company became an establish sub-contractor of the US gov’t
- Therefore, I expect improved earnings stability
Strategic divestments to focus on growth segments
- Defense spending in the US enjoys bipartisan support
- Therefore, spending is likely to growth between 2-4%
- Another characteristic of the defense industry is an increased consolidation of suppliers
- With strategic M&As, TTM could get further exposure to the resilient industry, driving stable revenue growth
Strategic divestments to drive future profitability
- TTM continues to reduce exposure to sensitive consumer and commodity segments to build a more resilient business
- In 2020, it divested its mobility business, which was highly capital-intensive
- Also, it shut down two of its low-margin electro mechanical solution (E-MS) plants
- As a result, 2020 revenue declined by 21% compared to its peak in 2017
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- However, net fixed assets shrunk by 36%, providing capital for profitable investments
Rising profitability has more to give
- The success of the divestments should be already reflected in 21E
- The gross margin is likely to reach 16%, which is 1bps higher YoY
- Over time, the company still has the ability to further expand the margin
- With a maximum of 16.5% in my forecast, I have been rather on the conservative side, leaving room for positive surprises
China poised to win 5G race, providing a growth catalyst
- As of 2021, China has built more than 1.1m base stations for 5G, equaling around 70% of global stations
- Continued aggressive expansion of 5G network could already lead to nationwide coverage by 2025
- Therefore, we expect strong demand for TTM’s printed circuit boards (PCB)
- The management expects 5-8% growth rate for this end market, which seems realistic
Networking end market could become 2nd largest segment
- TTM has 5 factories in China specialized in the production of PCBs
- Besides aerospace & defense, its products applied in the network industry could provide a growth catalyst for the mid-term future
- I think it’s a great opportunity for TTM to beat current market expectations
FVMR Scorecard – TTM Technologies
- A stock’s attractiveness relative to stocks in that country or region
- Attractiveness is based on four elements
- Fundamentals, Valuation, Momentum, and Risk (FVMR)
- Scale from 1 (Best) to 10 (Worst)
Analysts see a right time to buy
- All 6 analysts have a BUY recommendation with an average upside of 29%
- Consensus expects a robust revenue growth over the next few years
- Also, they believe that the company can expand its margin significantly
Get financial statements and assumptions in the full report
P&L – TTM Technologies
- The management plan to focus on more profitable and less cyclical end markets should pay off
- 2020 net profit is distorted by gains from divestiture
- I expect consistent growth in profits 21E onward
Balance sheet – TTM Technologies
- Net fixed assets decreased as a result of its divestments
- This leads to a solid cash position, providing funds for expansion of its core segments
- TTM has a healthy balance sheet
- Its net-debt to equity ratio stood at 0.3x in 2020 and should decrease further over time
Ratios – TTM Technologies
- TTM’s focus on higher segments translates into improved efficiency
- Gross margin in 21E and 22E could pass 16% and I expect the company to maintain it over time
Long-term share price performance potential
Free cash flow – TTM Technologies
- FCFF likely to grow consistently over time in line with higher profits
Value estimate – TTM Technologies
- Despite the management’s effort to become more profitable, I think it still has a long way to go
- However, my margin forecast is rather conservative
- Despite the management’s effort to become more profitable, I think it still has a long way to go
- Still, any positive surprise would add additional upside
World Class Benchmarking Scorecard – TTM Technologies
- Identifies a company’s competitive position relative to global peers
- Combined, composite rank of profitability and growth, called “Profitable Growth”
- Scale from 1 (Best) to 10 (Worst)
Key risk is high dependency on demand side
- Adverse regulatory changes, especially in China, could hamper the business
- Failure to meet quality standards and reliance on suppliers
- Dependency on top 5 customers which make up 1/3 of total sales
Conclusions
- Management strategy could lead to higher profitable growth
- Healthy balance sheet can support expansion of core segments
- Valuation is attractive; might be a cheap opportunity to buy
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