Should I Do It? TTM Tech Makes Its Mark

As the leading printed circuit board producer in North America, TTM Technologies (TTMI Quote) is used to leaving its mark on the electronics industry. But lately, the stock, which closed Tuesday at $11.34 -- down 20% from its September highs -- has taken its knocks from investors.

One reason for the company's struggles has been management's ambitious purchase of Tyco's(TYC Quote) printed circuit board business last October.

The deal bolstered TTM's exposure to the networking and military markets, adding key customers such as Raytheon(RTN Quote), which helped to more than double TTM's revenue. That said, in its fourth-quarter earnings report earlier this month, TTM said it was taking longer to realize merger synergies from the deal than first thought.

With that in mind, I'm here to answer readers' questions: Should I do it? Can TTM Technologies get back on the right track, or will management continue to struggle integrating the Tyco purchase?

TTM earned just 12 cents a share in the fourth quarter, falling 4 cents short of the consensus analyst estimate. Revenue of $144 million was in line with expectations, with TTM experiencing strong demand from its networking, military and medical customers but weakness in the high-end computing market, including top 5 customer IBM(IBM Quote). (Cisco(CSCO Quote) remains TTM's largest customer, and the only one accounting for more than 10% of total revenue in the most recent quarter.)

Overall, the company added 30 new customers during the quarter. Management also said the book-to-bill ratio, or quarterly bookings divided by revenue, fell to 0.83 in the quarter. The number did rebound to 1.0 in January; that's a positive sign that orders caught back up with revenue by the end of that month.

According to management's comments at a recent trade show in Los Angeles, TTM's pricing and customer demand have remained stable through February. Although integration issues with the Tyco purchase could linger until the second half of the year, management is confident the company can reach gross margins of 20% to 25% during 2007, compared with just 18.9% in the fourth quarter.

At current levels, TTM trades at just 13.2 times expected 2007 earnings of 86 cents a share, which is 14% less than the multiple of the benchmark S&P 500. According to Bloomberg, the company is also valued at a 20% discount to its peers.

So yes, TTM is attractive to purchase at current levels. The company may have bitten off more than it could chew with the Tyco purchase last year, but I believe the stock is already pricing in this risk at current levels. The company has the lion's share of the North American printed circuit board market, and once management can prove it has turned the corner in the merger-integration process, the stock will trade back up toward the low teens, closing the valuation gap relative to its peer group.