Can TTM Technologies Turn Into a High Profitable Growth Company?

By Andrew Stotz | February 1, 2022

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
- 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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DISCLAIMER: This content is for information purposes only. It is not intended to be investment advice. Readers should not consider statements made by the author(s) as formal recommendations and should consult their financial advisor before making any investment decisions. While the information provided is believed to be accurate, it may include errors or inaccuracies. The author(s) cannot be held liable for any actions taken as a result of reading this article.

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