The numbers are in from TTM Technologies' (Nasdaq: TTMI) first operating quarter after tacking on the Printed Circuit Board group acquired from Tyco (NYSE: TYC) last fall. That first quarter is rarely a good indicator of how the integration is working, because of the plethora of one-time expenses and general upheaval that follows a merger or acquisition. But under the circumstances, TTM appears to be doing as well as you can expect.
TTM has always had industry-leading margins, thanks to the profit-friendly quick-turnaround focus and operational efficiency. The Tyco division brought in plenty of fresh sales and a very nice slate of new customers like Boeing (NYSE: BA), Northrop Grumman (NYSE: NOC), and Raytheon (NYSE: RTN), but it also brought down margins across the board, and earnings came in far below the year-ago period.
The market seems skeptical about this merger. TTM shares are trading at just 1.7 times book value and 13 times trailing earnings, both well below five-year averages for this company. I think that's harsh.
Sometimes, it's useful to look past the integration costs, restructuring charges, and unusual tax effects to get a clearer picture of how the company is doing. On that basis, EBITDA actually improved 46% over the year-ago period. Now, EBITDA is a poor substitute for net income, cash flow, or owner earnings when it comes to evaluating a company's financial health, but at times of dramatic change, it has its place.
CEO Kent Alder is excited about the progress of this merger, and hopes to pick up new quick-turnaround business from old Tyco clients who aren't yet accustomed to having that option available. That segment of TTM's business generates much stronger gross and operating margins than the vanilla circuit board manufacturing, and it is this company's differentiating factor -- or moat, if you will.
But that change won't happen tomorrow or next week. Management guidance for the next quarter is on the bland side, with a 15% sequential uptick in a seasonally strong quarter that normally sees about 18% revenue growth.
The synergies created by the Tyco acquisition haven't come to fruition yet, but the signs of healthy progress are there, just below the surface. Imagine the new TTM with a dash of the old TTM's top-to-bottom efficiency, and apply a conservative 12% net margin to the $171 million we're supposed to see in the first quarter, and you have EPS of $0.49 and a company worth more than twice its current price tag (assuming a constant P/E ratio).
It's a pipe dream right now, but check back in a year or so, and the idea might not look ridiculous anymore. Tom Gardner picked this company for our Stock Advisor service for a reason, and I think there are some great things to come.
Further Foolishness:
TTM Technologies is a
Motley Fool Stock Advisor
pick, and Tyco International is an
Inside Value
recommendation.
Fool contributor Anders Bylund holds no position in any of the companies discussed here. You can check out Anders' holdings if you like, and Foolish disclosure is a long drink of water in the wastelands of Wall Street.
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