TTM Technologies

Moat: 2/5

Understandability: 3/5

Balance Sheet Health: 3/5

TTM Technologies is a global manufacturer of technology solutions, including high-frequency printed circuit boards (PCBs) and other electronic components for a variety of industries, with a focus on aerospace, defense, data center computing, and automotive markets.

Investor Relations Previous Earnings Calls

The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

TTM Technologies is not a business that is easy to analyze and understand, as it operates in various industries and has complex customer requirements. However, we will be evaluating it and giving it a rating.

Business Overview TTM Technologies (TTMI) is a global manufacturing company specializing in technologically advanced electronic components and related products.

  • Revenue Streams: TTM’s revenue is diversified across several key sectors:
    • Aerospace and Defense: A significant portion of their revenue comes from supplying complex PCBs and other components for aerospace and defense systems, benefiting from the high regulatory standards that favor incumbents.
    • Data Center Computing: TTM serves a growing market with the demand for high-speed and reliable data infrastructure.
    • Automotive: The automotive sector is a significant segment for the company, providing specialized PCBs for automotive applications.
    • Medical, Industrial, and Instrumentation: These categories represent smaller, but important revenue streams for the company.
  • Industry Trends:
    • Increasing complexity in electronic designs: As technology advances, the complexity of PCBs required by various industries, especially for things such as artificial intelligence systems, and advanced driver assistance systems, requires greater precision and more advanced technologies.
    • Need for reliable supply chains: There is a rising preference for domestic and nearshore production. This preference is due to geopolitical concerns and the recent supply chain disruptions.
    • Push towards high speed and high frequency: There is an increased demand for advanced high-speed networking products and more advanced components for 5G and other communication protocols.
    • Global Supply Chain Disruptions: These disruptions have created bottlenecks and raised input costs for manufacturers, highlighting the importance of diversifying and stabilizing supply chains.
  • Competitive Landscape:
    • Competition is intense with other PCB and electronic components manufacturers. Many competitors are highly capable and also pursue scale benefits. As a result, there is not a strong moat for these manufacturers.
    • Larger competitors have more established operations, broader scale, and more resources. This makes competition quite severe and can drive pricing pressures.
    • Smaller manufacturers often offer niche capabilities and faster delivery times. Because of these features, smaller companies could prove a strong competitor.
  • What Makes TTM Different?:
    • Breadth of products: TTM has a massive portfolio of different products and services, allowing it to cater to a wide array of customers.
    • Specialized solutions for demanding industries: TTM has a special focus on the defense industry, data centers, and the automotive industry. These specialized fields provide higher profit opportunities since they have high barriers of entry.
    • Vertical Integration: The company’s vertical integration into key areas of its manufacturing process helps it control cost and product quality.
    • Strong relationship with customers: TTM works together with its customers on the design and manufacturing of high-performance applications. This long-lasting relationship can result in future sales.

Moat Analysis & Rating: 2 / 5

TTM Technologies’ ability to build a wide moat is limited by several factors:

  • While the company benefits from high barriers to entry in the aerospace and defense sector and possesses scale advantages, these are not very difficult to overcome.
  • There are not any strong switching costs associated with the company, since other PCB manufacturers exist.
  • TTM also faces intense competition from other major players that are often larger than TTM. This competition limits profitability due to pricing pressures and commoditized products.
  • Overall the business is a mix of commodity type products and products with higher barriers to entry.
  • Therefore, although TTM possesses a narrow moat due to high quality processes, and specialized relationships, they don’t have much pricing power and a lot of competition in certain sectors.

Legitimate Risks that Could Harm the Moat and Business Resilience

Several risks could hurt TTM’s business:

  • Dependence on Key Industries: A downturn in the aerospace, defense, or data center industries could significantly impact revenue.
    • Response: Continue to diversify into additional key sectors, and develop new product and service offerings.
  • Intense Competition: There is very strong competition from other manufacturers in the space.
    • Response: Try to differentiate with high quality products, and build strong relationships with the customers to obtain more orders.
  • Rapid Technological Change: Obsolescence of existing technology can reduce the value of the company’s manufacturing processes.
    • Response: Keep investing into research, development, and innovation.
  • Supply Chain Vulnerabilities: Supply chain disruptions or price increases of key materials could increase production costs and hurt profit margins.
    • Response: Establish multiple sources of supply and diversify supply chains geographically.
  • Financial Risk: High levels of debt could restrict future growth and lead to financial instability.
    • Response: Continue to pay down debt and manage leverage. Also, ensure financial flexibility by retaining a reasonable amount of cash on hand.
  • Customer Concentration: The company is dependent on a small number of major customers, which can lead to unstable revenues if they decide to switch or reduce orders.
    • Response: Try to expand customer base into a wide range of new customers.
  • Geopolitical instability: Tensions between countries may lead to economic disruptions that could hurt global revenue.
    • Response: Diversify globally, and seek to build supply chains and production facilities in different locations.
  • Economic recession: Recessionary periods can affect demand and increase pricing pressures on the business.
    • Response: Have strong capital base to sustain the company throughout a down-cycle.

Business Resilience: Despite the numerous risks mentioned above, the company shows some degree of resilience through their diversified revenue streams, long lasting relationships, and vertical integrations. These factors, as mentioned previously, allow the company to withstand competition and some sector-based disruptions and help improve its long-term sustainability. The company has also demonstrated a commitment to innovation, which is important to respond to market shifts and changing customer needs.

Financial Overview

TTM Technologies shows a mixed financial picture with a variety of concerning facts:

  • Revenues: Although the revenues have grown decently in recent years, it seems that their revenue growth is slowing down, and is unlikely to revert back to past growth levels. In addition to that, revenues are volatile, with some years having large growth, and some having negative growth.
  • Profitability: Margins are relatively low and declining year-over-year. The company has high operating expenses, and is unable to generate consistent profit. They also spend a lot of money in R&D.
  • Debt: While not overly leveraged, the company has a substantial amount of debt, which could lead to financial stress if the business suffers a downturn in performance.
  • Financial Flexibility: Their cash flows are volatile and not predictable. This leaves them highly vulnerable to negative impacts from the industry.

Understandability: 3 / 5 TTM’s business model is moderately complex due to the specialized nature of its offerings and its operations across different industries. However, the core business model and the basic financial information are easy to comprehend. It is difficult to understand the competitive landscape and the many risks that the company faces. The company also has a wide variety of factors and dependencies that could lead to a change in its performance. Therefore, it is not incredibly easy to understand the company.

Balance Sheet Health: 3 / 5 The balance sheet shows a combination of both positive and negative aspects for the company:

  • They have some positive working capital figures and assets, which would provide liquidity. However, they are not exceptionally liquid.
  • The debt to equity level, while acceptable, is still on the higher side and may increase financial risks during times of poor performance.
  • However, the company also has a substantial amount of intangibles that are hard to value. The company is also reliant on consistent cash flows that are not always guaranteed.

Overall, the balance sheet is a mix and leaves questions about financial health.

Recent Concerns/Controversies

  • Supply Chain Issues: TTM has noted that they are still facing problems related to the supply chain with long-lead time components. This has caused them to try to improve their inventories and diversify their supplier base.
  • Labor Costs: Higher labor costs due to competition have impacted the industry as a whole, and have therefore impacted TTM as well.
  • Acquisitions: The company has performed several acquisitions and will need to successfully integrate these companies into its existing business.
  • Macroeconomic Headwinds: The recent macroeconomic downturn has resulted in higher interest costs, while creating an environment with reduced demand in some sectors. This has caused reduced earnings and revenues, and concerns about profitability.
  • China: Recent tensions with China have caused increased uncertainty. As a result, TTM is trying to explore diversifying manufacturing capacities into areas other than China.

Overall TTM Technologies is a complex business that has both strengths and vulnerabilities, and is trying to operate in an unpredictable market environment. This creates a high risk investment, although it might be worthwhile to investigate more deeply.