Shares of



fell 2.7% Tuesday, closing at $33.64, after the brokerage Needham & Co. cut its rating on the company from buy to hold. Even so, shares of the electronics test and equipment maker are up 13% over the past month.

One reason that the market has become interested in Tektronix is that management added $350 million to the company's buyback program Monday night. This boosts the overall authorization to $691 million (20.5 million shares), or some 26% of the company's outstanding shares. Sell-side analysts have estimated that the repurchase would add 5 cents to 10 cents a share to Tektronix's fiscal 2008 earnings. In addition to the buyback program, the company also pays a 6-cent quarterly dividend, or an annual yield of 0.7%.

Tektronix ended its fiscal fourth quarter (ended May) with $358.1 million of cash and investments on the balance sheet, aided by $128 million of free cash flow generation over the past four quarters. Formerly debt-free, the company also said June 25 that it will sell $300 million of convertible notes to help finance the buyback.

With that in mind, I'm here to answer readers' questions: Should you buy it? Is Tektronix mortgaging its future for near-term gains, or can the stock rebound from its recent pullback and continue to push higher?

Tektronix, which is the largest producer of oscilloscopes, devices used to show voltage strength and test electronics, in the world, posted mixed fiscal fourth-quarter results June 21. The company earned 45 cents a share, which was 3 cents ahead of the consensus analyst estimate. Revenue grew 3.2% from the previous year to $298.5 million, $3.3 million ahead of analyst expectations. The company's operating margin also improved a full percentage point year over year, to 16.4%.

On the other hand, Tektronix said that customer orders fell 7% from the previous year and that its backlog grew just 1% during the quarter to $283 million. Investor fears were also raised after Tektronix posted a 26% year-over-year decline in orders for its communications division in the most recent quarter. That said, the segment, which helps wireless operators maintain network reliability, accounted for just 20% of total revenue during the most recent quarter. Elsewhere, orders in the core instruments business were up 3% year over year, driven by the successful launch of a new mixed-signal oscilloscope and a spectrum analyzer, which is used to test wireless networks.

At current levels, Tektronix is valued at 19 times expected full-year earnings of $1.79 a share. This is a 14% discount to the company's historical average valuation and a 6% discount to the multiple that chief competitor


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With that in mind, I believe that Tektronix remains attractive to purchase at current levels. The recent convertible offering could continue to hang over Tektronix shares in the near term, but new product offerings should help management sustain recent margin growth.

As a result, I believe the stock can find a near-term bottom around $32 a share. Given the magnitude of the company's buyback program, funded primarily by its consistent internal cash flow, Tektronix shares could trade up toward $40 over the coming quarters.

David Peltier is a research associate at In keeping with TSC's editorial policy, he doesn't own or short individual stocks. He also doesn't invest in hedge funds or other private investment partnerships. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Peltier appreciates your feedback;

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