Chip Recovery Doubts Create A Buying Opportunity

| June 10, 2010 | 0 Comments

Fear over the European debt crisis is spreading faster than the Black Death.  The Black Death wiped out 30% to 60% of Europe’s population (over 100 million people) during the Middle Ages.

But it took two years to achieve its grisly end.

The panic over Europe’s debt crisis (admittedly not as horrific as a bubonic plague epidemic) is moving much faster.  This cruel event is causing massive wealth destruction in just a matter of weeks.

In fact, since fears of a Greek default reached their apex in late April, the market has lost over $1.3 trillion.

The latest victim of the European contagion “fear epidemic” is the semiconductor sector.  In just the past several days, chip stocks have dropped 8.8%.

A few Wall Street analysts are to blame.

They’re saying the semiconductor industry’s recovery will falter if Europe slips into a “double dip” recession.  They’re concerned European demand for computers, cell phones, and other electronics will dry up.

Then to top it off, they’ve downgraded Intel (INTC) and Broadcom (BRCM) to Neutral (whatever that means).

I think these analysts are blowing things out of proportion.

Don’t get me wrong.  Europe is an important market.  But this recovery is a global recovery.  Demand is surging all over the world.

Just last week, prominent market research firm, Gartner, raised their 2010 revenue estimate for the semiconductor industry.  They were expecting a 19% year over year increase in global chip sales.  Now they’re forecasting a whopping 27% jump!

Why is Gartner boosting their outlook so much?  Simply, they’re seeing “an accelerated broad-based recovery in all regions and most product categories.”  (Europe was not flagged as a potential risk to this estimate.)

And they’re not the only ones seeing a surge in global demand.

Samsung, the world’s largest producer of memory chips, recently posted record revenues in the first quarter.  They’re seeing very strong demand for chips and flat screens.  And most importantly, they “don’t see any impact from the Euro Zone crisis on the semiconductor market”.

Then yesterday, Texas Instruments (TXN) raised their revenue and profit outlook for the second quarter.  When asked about Europe, the company’s head of investor relations said they “haven’t seen any change yet in demand”.

Another chip maker who recently raised second quarter earnings guidance is Altera (ALTR).  They’re seeing strong new product sales.  No mention of demand dropping off in Europe.

Clearly, major players in the semiconductor industry aren’t seeing any fallout from the European debt crisis.  And if European demand should slacken, robust demand from Asia and North America should make up for it.

Based on this overwhelming evidence, I’m sticking to my bullish call on the chip industry… and the chip equipment makers.

Speaking of which…

I have uncovered another fast growing, misvalued semiconductor equipment company.  Now I’ve already told you about the huge profit opportunities in MKS Instruments (MKSI) and Novellus Systems (NVLS).

Today I’d like to introduce Teradyne (TER).

Teradyne is a leading global provider of semiconductor testing and inspection equipment.  Their customers are leading companies in the semiconductor, electronics, automotive, and networking industries.

With a market cap of $1.8 billion, Teradyne is a quality mid-cap growth stock.  And as you’ll soon find out, the shares offer huge profit potential.

Teradyne is just starting to see growth accelerate.

Take a look at the company’s blowout first quarter numbers.

Revenue increased 23.4% sequentially and 173.3% year over year to $329.6 million.  That handily beat management guidance and analysts’ estimates.  Best of all, demand was strong across the board from memory chip makers and foundries.

Net income soared 109% sequentially to $61.3 million.  Earnings jumped 94% to $0.33 per share.  And both figures easily beat analysts’ estimates.

A robust quarter by any measure.

What’s more, management is forecasting more strong growth in the current quarter.

They’re expecting revenue to increase 18% to 27% sequentially.  And they’re looking for earnings per share to rise 36% to 58%.

Despite this strong growth outlook, the shares are seriously misvalued.

Thanks to the market correction, Teradyne shares are down 26% from their 52-week high of $13.37.  This presents a golden opportunity to pick up shares at bargain prices.

At $9.88, the shares are trading just 6x the 2010 earnings estimate of $1.60.  That’s a very low P/E for a company expected to grow earnings 18% a year over the next five years.

In fact, Teradyne’s P/E is less than half the industry average of 13x.

I think you can see the huge upside in this stock.

At just 10x the 2010 estimate, Teradyne’s worth $16.10.  That’s a potential profit of 63%!

Using a P/E equal to the industry average, the shares are worth $20.80.  A potential gain of 111%!

Like I said, Teradyne is a screaming bargain.  Don’t miss your chance to make some serious money with this quality mid-cap over the next year.

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Category: Stocks

About the Author ()

Robert Morris is the editor of Penny Stock All-Stars, an investment advisory focused on discovering small-cap and micro-cap stocks that are destined to become the market’s next Blue Chips. The Wall Street veteran and small-cap stock specialist is also a regular contributor to Penny Stock Research. Every week, Robert shares his thoughts with our readers on a variety of penny stock-related topics. In addition to Penny Stock Research, Robert also writes frequently for two other free financial e-letters, ETF Trading Research and the Dynamic Wealth Report. He’s also the editor of two highly successful and popular investment advisories, Biotech SuperTrader and China Stock Insider.

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