Teradyne Guidance Brings Relief, But The Near-Term Looks Challenging

Semiconductor test equipment typically follows a different pattern than other types of semiconductor equipment, but the market was in a “shoot first, ask questions later” mood on Teradyne (TER) going into the fourth quarter, concerned about an overall decline in the semiconductor sector and perhaps some company-specific risk tied to Apple (AAPL). On top of all that, I believe there were growing concerns that the weakness in China and auto customers expressed by Yaskawa (OTCPK:YASKY) and Fanuc (OTCPK:FANUY) would spill over into Teradyne’s fast-growing cobot-driven Industrial Automation segment.

All things considered, business is holding up a little better than feared. The first half of 2019 is going to be challenging, and the cobot business likely isn’t going to grow as fast, but investors were prepared for worse. With revenue growth potential in the mid-to-high single-digits and FCF growth potential in the high single digits, I believe these shares are undervalued, but market expectations of improving conditions for semiconductors and semiconductor equipment could still leave some perception risk, not to mention the risk of further deterioration in China and auto end-markets.

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Teradyne Guidance Brings Relief, But The Near-Term Looks Challenging