benedek
TTM Technologies, Inc. (NASDAQ:TTMI), a manufacturer of printed circuit boards, has come to life in the last four months with the stock soaring higher. This after the stock stayed moribund in the first four months of 2024. The latter behavior is more typical of what TTMI has tended to do in recent years, all the more reason why the recent surge in the stock stands out. In fact, the recent performance is likely to encounter skepticism things have really changed. Some may be inclined to think the recent episode is another temporary rally that reverses itself, something that has happened many times before and which may cause some to think twice about jumping in. Why will be covered.
TTMI has come to life in a big way
A past article from November 2023 rated TTMI a hold even though there was a case to be made to be long TTMI. Multiples were very much on the low side with TTMI, for instance, available at just below book value. The most recent earnings report also came in strong and the stock had rallied in its wake. However, the article passed on going long because of TTMI’s penchant to give up gains as often as it acquired them, resulting in a stock that has basically gone sideways for a long time.
Source: Thinkorswim app
The chart above shows how for most of the almost ten months that have passed since the last article was written, the article’s conclusions were on point with the stock unable to keep its initial rally going, Instead, the stock went more or less sideways for months. That is, until the release of the second-to-last earnings report in May, which seems to have triggered an uptrend in the stock that continues to this day.
TTMI has generally moved higher since then. The stock did drop in late July/early August along with the stock market as a whole due to various reasons like tensions in the Middle East and changes to the interest rate policy of the BoJ. The stock was also overbought after a gain of close to 70%, going from a low of $13.43 on May 1 to a high of $22.71 on July 16. Still, the general direction of the stock for the last several months is pointing up. This is different from before when TTMI was moving sideways.
Source: Thinkorswim app
The chart above shows why the recent change is so significant. TTMI spent years going horizontally more or less, rallies and counter-rallies notwithstanding, centered around the $14 price point or so. The recent breakout out of the sideways pattern is therefore something worth taking note of. It is something that could fuel speculation that this time it is for real, after many previous rallies ended prematurely.
Why did TTMI start to rally all of a sudden?
The last four months of 2024 have been the opposite of the first four months, and not without reason. The prior charts show how the second-to-last report played a crucial role, since the surge in the stock coincided with its release. This surge comes against a backdrop of a stock that has long had a tough time moving forward, and the reason for this is because growth has been pretty much non-existent in recent years at TTMI.
For instance, revenue in the last completed fiscal year or FY2023 was $2,233M, not very different from five years earlier or FY2018 when revenue was $2,238M. The CAGR for the last five years is minus 1.75% for TTMI. So business has been fairly stagnant for a long time, but the Q1 FY2024 report suggested that, while Q1 revenue came in almost unchanged QoQ, growth was about to accelerate.
TTMI referenced several drivers to power the growth expected. Demand, for instance, has gotten a boost from increased defense spending due to various armed conflicts in the world. An important development since Aerospace & Defense is responsible for close to half of all sales at TTMI. However, it was the other driver that got the stock to rally the way it did.
TTMI has seen increased demand emanating from increased spending on AI-related applications. The market has been on the lookout for winners from AI and many stocks have gotten a boost from being perceived as a winner from AI, which helps explain why the stock spiked higher after the Q1 FY2024 report in May after AI entered the picture.
Is the rally in TTMI warranted?
If someone looked closely at the prior charts, then he or she may have noticed that the stock dropped after the most recent or Q2 FY2024 report. True, the drop coincided with a stock market selloff in early August, which pulled TTMI lower along with other stocks. Yet, the stock has rebounded after selling off and the stock’s direction is still pointing higher as mentioned before.
Nonetheless, it’s worth looking into why the stock dropped 6.6% in response to the most recent report from TTMI. Keep in mind that while the stock has rallied in the past few weeks, along with most stocks after the stock market selloff in early August, TTMI is still below where it traded before the release of the Q2 FY2024 report.
The Q2 FY2024 numbers themselves came in strong, as TTMI suggested in May after the Q1 FY2024 report. The consensus was looking for non-GAAP EPS of $0.34, but TTMI reported $0.39, or $0.05 more than expected, on revenue of $605.1M. The table below shows how the Q2 results were significantly better QoQ and YoY.
(Unit: $1000, except for EPS)
(GAAP)
Q2 FY2024
Q1 FY2024
Q2 FY2023
QoQ
YoY
Net sales
605,137
570,113
546,509
6.14%
10.73%
Gross margin
19.4%
18.2%
18.0%
120bps
140bps
Operating margin
6.4%
3.0%
3.9%
340bps
250bps
Operating income (loss)
38,986
17,067
21,408
128.43%
82.11%
Net income (loss)
26,352
10,466
6,824
151.79%
286.17%
EPS
0.25
0.10
0.07
150.00%
257.14%
(Non-GAAP)
Net sales
605,137
570,113
546,509
6.14%
10.73%
Gross margin
20.0%
18.8%
19.2%
120bps
80bps
Operating margin
9.0%
7.1%
8.4%
190bps
60bps
Operating income
54,523
40,693
46,090
33.99%
18.30%
Net income
40,131
32,787
33,044
22.40%
21.45%
EPS
0.39
0.31
0.32
25.81%
21.88%
Adjusted EBITDA
84,560
74,789
74,722
13.07%
13.17%
Click to enlarge
Source: TTMI Form 8-K
However, while the Q2 FY2024 results showed a clear acceleration in growth, Q3 FY2024 guidance was on the soft side. Guidance calls for Q3 FY2024 revenue of $580-620M and non-GAAP EPS of $0.37-0.43 as shown in the table below. While Q2 showed a large QoQ jump in results, Q3 is forecast to come in flattish and might even contract at the low end of guidance.
Q3 FY2024 (guidance)
Q3 FY2023
YoY (midpoint)
Revenue
$580-620M
$572.6M
4.79%
Non-GAAP EPS
$0.37-0.43
$0.43
(6.98%)
Click to enlarge
Source: TTMI Form 8-K
Nonetheless, TTMI reminded the market of the growth drivers, which included AI. TTMI is experiencing headwinds, but they were negated elsewhere. From the Q2 earnings call:
“Revenues were above the guided range, representing the second consecutive quarter of year-on-year growth due to demand strength from our aerospace and defense and data center computing end markets, the latter being driven by generative AI.
The growth in revenues was partially offset by year-over-year declines from our medical, industrial and instrumentation, automotive and networking end markets.”
Source: TTMI earnings call
TTMI looks cheap if earnings grow as projected
TTMI has managed to rally and recoup a portion of the losses suffered in the wake of the Q2 report and the stock market selloff. It is possible the market may be assuming that TTMI is being conservative with its Q3 guidance and that it will surpass guidance, just as it did Q2 guidance. TTMI did after all beat Q2 expectations by a comfortable margin, so it is possible that could happen again when it reports again.
The general consensus is still that earnings will grow in the coming quarters. A look at earnings projections on Wall Street suggests TTMI will end FY2024 with non-GAAP EPS of $1.54, which implies a P/E ratio of 12.9x with the stock priced at $19.93. Moreover, EPS is projected to keep growing to $1.85 in FY2025, an increase of 20.1% YoY. This would result in a P/E ratio of 10.8x if the stock remains at $19.93.
Keep in perspective that this growth in earnings follows a contraction in the past years. TTMI earned $1.33 in FY2023 and $1.74 in FY2022 for comparison. So some of the growth is due to getting back what was previously lost. Still, an argument can be made that TTMI looks cheap, especially if TTMI can grow earnings as is expected.
Other multiples are similarly appealing. For instance, TTMI has a book value of $1,528.9M with total assets of $3,343.4M and total liabilities of $1,814.5M. This translates to a book value of $14.97 per share with total number of outstanding shares at 102.11M, which means TTMI is valued at just 1.3 times book value.
The combination of growth and relatively low valuations is appealing. The above could be why the average price target on Wall Street is $24.81 for TTMI. This is roughly a quarter above TTMI’s current value, with the stock at $19.93. TTMI could be a good buy at current levels, assuming, of course, TTMI grows as projected.
Is the rally in TTMI sustainable?
TTMI has seen its appeal go up with the rise of AI. This is not that different from what has happened to other stocks that have seen their stock price go up in anticipation of growth driven by AI-related demand. However, it is worth keeping in mind that it remains to be seen whether AI will live up to its admittedly vast potential.
While companies are undoubtedly pouring vast sums into AI, it is less clear as to whether the benefits they are getting in return for doing so is in proportion. In fact, there are reports that suggest companies are getting less in return than what they are putting into AI. This raises doubts about the sustainability of AI spending, since returns are needed to be sustainable.
For instance, a recent research report from the Rand Corporation determined the vast majority of all AI projects fail to achieve their stated objectives. The report concludes the main reason is because there is a disconnect between stakeholders as to what is to be achieved using AI and what AI can actually achieve.
The reports suggest that there is a lot of capital being wasted on AI projects that do not deliver or not to the extent aimed for. If this continues, then companies who have benefited from AI spending could stand to lose the tailwind pushing them forward. In other words, AI has been a tailwind for many, but whether it remain so is up in the air.
Investor takeaways
TTMI has long been somewhat of a disappointment for those who were willing to put their money into the stock. The stock has been able to rally at times, but each was followed by a selloff just as large. The result has been a stock that has gone in circles, only to wind up where it began. This was the case for years.
A major reason why the stock was unable to keep a rally going was because of the inability to keep growth going. Revenue was flat for years, although there were times growth picked up for a while. However, the stock has rallied in the past several months after TTMI suggested growth was about to accelerate from where it has been with the assistance of AI.
TTMI also happens to be available at fairly low multiples, even after the recent rally. This, together with a projected growth in earnings, makes for a compelling case to be long TTMI. Nonetheless, the case to be long is not a slam dunk. The future of what AI will bring is up for discussion. There are many reports that suggest the current level of heavy spending on AI is not guaranteed and might even be unsustainable.
If AI spending drops, then that would adversely affect those companies that depend on AI to power growth ahead. Similarly, TTMI has benefited from increased defense spending, but for how much longer is not a sure thing. Defense spending may not be as prone to sudden fluctuations like, for instance, enterprise spending, but it also does not have the growth potential since many governments are already dealing with large budget deficits and there is simply not much room for increased spending.
There is certainly a case to be made in favor of long TTMI and the stock may very well continue to rally since the AI boom does not appear to be anywhere close to being over, but I am neutral on TTMI. There is reason to doubt TTMI’s ability to sustain its recent progress, whether it is growth in the top and the bottom line, but also the stock itself.
The drivers behind the recent improvement in quarterly results may not always be there. In fact, they may go away sooner than expected. The stock has rallied, but it would not be the first time the stock surrenders what it gained previously. The stock seems to have benefited from the AI boom, but if or when the AI boom comes to an end for whatever reason, the opposite could happen.
Bottom line, long TTMI is worth taking into consideration if one is confident that AI will live up to its promise and companies can keep investing in AI like they have. If that happens, TTMI has a shot at keeping the rally going, especially with valuations where they are. But should AI fall short, TTMI is going back to what it used to do until quite recently, which is nothing to write home about.
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