Putting Tektronix to the Test

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You can't build or repair electronic equipment without test and measurement gear -- the specialty of Tektronix (NYSE: TEK). Is it a good investment?

When compared with last year's fourth quarter, fourth-quarter results for fiscal 2005 were weak. Net sales increased 1% while net earnings fell 6%, after a number of one-time items related to acquisition costs were excluded. Sales beat guidance the company offered in mid-May, when it warned of weak orders; earnings fell within guidance.

In fact, fourth-quarter orders were very weak, falling 8% overall and 25% in the U.S. For comparison, competitor Agilent's (NYSE: A) test and measurement gear orders increased 2%, while year-over-year orders fell sharply at Teradyne (NYSE: TER), which concentrates on semiconductors.

Those looking for hard numbers on Tektronix's $325 million acquisition of Inet will be disappointed. While the company said Inet's growth was stronger than initially projected, it combined Inet's orders with those of Rhode & Schwarz -- a strategic alliance that was shut down in June 2004 -- making it difficult to determine financial results or value added, or both, from the acquisition. Orders for the two were down 2% in the fourth quarter.

One interesting side note is that the senior Tektronix executive who oversaw Inet has left to join Agilent.

While the company still sees softness in some markets, it has ramped up research-and-development spending to 17% of sales in the fourth quarter and 16% of sales for the fiscal year. That's up from 14% for both periods last year. That increased spending should hopefully enable Tektronix to increase introductions of products this fiscal year.

So, what kind of investment is this company?

With $131.6 million in the bank, and no debt, the balance sheet is rock-solid. But when you look at this five-year chart, you see that Tektronix has pretty much tracked the Standard & Poor's 500. That probably isn't going to change, because analysts expect Tektronix to compound earnings at 12% a year over the next five years, while the S&P 500 compounds at 10.6% a year. For that matter, the increased R&D spending amid declining orders (while competitor Agilent's orders nominally increased) indicates the very competitive nature of the industry. For Tektronix and Agilent alike, there is a strong need to innovate, as competitive advantages (or lack thereof) ebb and flow with each company's technological advance.

You can also get a snapshot of Tektronix's 2005 numbers here.

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Fool contributor W.D. Crotty worked for Tektronix 20 years ago but does not own its shares or the shares of any of the companies mentioned. Click here to see The Motley Fool's disclosure policy.