TTM Technologies Validates New Model

If you owned TTMI (TTM Technologies), America's largest manufacturer of printed circuit boards (PCBs), at the beginning of the week and held it until the market closed on Friday, you saw your shares go from $10.52 to $13.63, or up 29.6%, with most of the advance made on Friday.

Why the sudden excitement? On Thursday TTM announced third quarter (Q3) results and held its analyst conference call. Essentially TTM's acquisition of Meadville, a Hong Kong based PCB manufacturer with facilities in mainland China, turned out to be a smart move. This was the first full quarter after the Meadville acquisition, so you can begin to see why TTM has set itself on track to be a global powerhouse in the coming decade.

But why was the stock price low to begin with? It is not that TTM had been doing badly, though it had its setbacks during the late recession. The background is that the PCB industry in the U.S. has been shrinking for over a decade, even as global PCB demand rose. Manufacturing moved to other nations, most notably China. This was especially true for volume production, like consumer items that have runs of 100,000 units or more.

To keep itself profitable TTM, and some competitors like DDi (DDIC) has specialized in making boards in smaller batches, and in particular when newer technologies are required. Small batches can be prototypes for larger production runs, or can be for industrial or medical instruments where only a few, or a few hundred, boards are needed. TTM provides a level of expertise in designing and manufacturing boards for the new, micro-sized electronic components that few PCB companies in the world can match. They are able to charge for that expertise and maintain a good profit margin. Even in the first quarter of 2009, TTM squeezed out a profit on lower revenues.

Meadville does do large scale PCB manufacturing in China, but mostly at the high end, for instance for Apple products. So their profit margins were also good. For years TTM looked to acquire an Asian PCB manufacturing so they could help their customers on large production runs. In theory the new model is: prototype the PCB in American facilities of TTM, then do large runs in TTM's China facilities.

However, so far mostly we are just seeing that Meadville was a well-run, profitable business, that TTM paid a fair price for it, and that the resulting combination is about as profitable as it looked like it would be.

For Q3 2010, revenues were $357.8 million, up 15% sequentially from $310.2 million and up 157% from $139.1 million in the year-earlier quarter. GAAOP net income was $32.1 million, up by a factor of 4.8 sequentially from $6.7 million and up from negative $4.9 million year-earlier. Resulting in GAAP EPS (earnings per share) of $0.36, up 6x sequentially from $0.06 and up from negative $0.11 year-earlier.

If you use $0.35/share as the new run rate, TTM is generating $1.40 in earnings per year. So even at Friday's closing price the rate of return is very attractive.

One thing to watch, however, is debt. Meadville had acquired a lot of debt in expanding its facilities, and now TTM has taken on that debt. Interest rates are favorable and plenty of cash is being generated to pay off the debt over time, but it is still a negative.

For more detail you can read my Q3 2010 TTM Technologies (TTMI) analyst call summary

And of course the TTM web page.