Friday, June 15, 2012

TER: Weak chart, but feel the love!

Teradyne Inc. (TER) sells automatic test equipment for semiconductors, wireless products, data storage and complex electronic systems. When people have systems that are too important to fail, the North Reading, Massachussetts company's goal is to provide testing functions that provide early warning of problems before they become fatal to those systems.

The investment research house Zacks named TER as its "Bull of the Day" in its free Profit from the Pros newsletter published today. I haven't read the Zacks report yet to ensure that my own analysis is independent. You can read it here.

At first glance the TER chart seems to show a former bull who has fallen on bearish times, who tries on occasion to recover past glories, but can never quite work up the energy for anything more than a feeble try.

TER capped its post-recession rise with a leg up that began in August 2010 at $9.64 and carried the price up to $19.19 by February 2011. Fro;m there, the price fell to below $11, and then last October began to claw its way back up, peaking April 26 at $18.01 before beginning another tumble down to $13.40.

It has since recovered from that swing low, but without much conviction -- a three-day rise followed by five days of sideways. The price is on the rise again today, hitting a high so far of $14.43.

However, the sideways range runs from about $14.60 down to $13.80, so the price has yet to break from its bounds, and there is no guarantee that it will. Thursday, an up day, saw lower volume, never a positive sign when it comes to upside momentum.

So the key levels are $14.60, which would signal a breakout, and then $15.24, a retracement high set May 29 on the decline from the April 26 peak.

And it is important to remember, big picture, that although TER has set a lower high since its 2010 peak, it has yet to set a lower low. There is nothing on the weekly chart that rules out labeling TER as being in an uptrend.

One thing to like about Teradyne is that although it fills a niche, it's a niche that encompasses a number of markets. It's an infrastructure company, and while such operations lack the bling of a retail product, they are in many ways more indispensable.

Perhaps that in part explains why, despite the bearish inclinations of recent trading, the analyst consensus is very bullish on TER. And institutions are betting heavily on TER -- they own nearly all of the shares.

Teradyne has a weak chart, it is true, but in the realm of professional analysis, you can sit back and feel the love.

A glance at the financials supports analysts' optimistic view. Return on equity is 22%, and long-term debt is quite low, amounting to only 11% of equity.

Earnings are a weak point -- not that the company isn't profitable but there is no earnings acceleration. From 2011 the quarterly earnings have jitterbugged all over the place, while remaining on the plus side throughout. And every quarter has shown an upside earnings surprise.

The price premium is not shockingly high by any means. It takes $1.82 in shares to control a dollar in sales.

On average TER trades 3.1 million shares a day, sufficient liquidity to support a wide selection of options with moderate to high open interest and narrow bid/ask spreads.

Implied volatility stands at 36%, slightly above the midpoint of the six-month range. it has been working its way higher since mid-May.

Options traders are confident that 68.2% of trades will be priced between $12.93 and $15.91, a gain or loss of 10% from the current price.

Current option trading is hot on the call side, with volume running nearly four times the five-day average. Puts are correspondingly idle, with volume amounting to 39% of the five-day average.

Teradyne next publishes earnings on July 23.

Decision for my account: I like TER on a persistent breakout above $14.60 and, if other demands on my trading funds allow it, would open a bull position on TER under those circumstances. The lack of earnings acceleration is more troubling to longer-term traders, such as value investors. For someone with my short time horizon -- not so much.

Tim Bovee, Private Trader tracks the analysis and trades of a private trader for his own accounts. Nothing in this blog constitutes a recommendation to buy or sell stocks, options or any other financial instrument. The only purpose of this blog is to provide education and entertainment.
No trader is ever 100 percent successful in his or her trades. Trading in the stock and option markets is risky and uncertain. Each trader must make trading decision decisions for his or her own account, and take responsibility for the consequences.

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