Texas Instruments Finds Big Profits In Small Packages

8/31/2010


  Recent Price
$24
  Dividend
$0.48
  Yield

2.0%

  P/E Ratio
12
  Shares (millions)
1,221
  Long-Term Debt as % of Capital
0%
  52-Week Price Range
$27.44 - $22.26

Texas Instruments ($24; TXN) makes semiconductors, microchips cut from thin silicon wafers that play an integral role in nearly all types of electronic equipment.

Before the recession, TI struggled to find sales growth. But during the downturn, TI managed to pick up market share while adjusting its product mix to enhance profit margins. Revenue rose at least 20% in each of the last three quarters. While recent growth reflects a rebound from the bleakest periods of the downturn, profit margins have also surged.

Investors are worried about a tech-sector downturn, but consensus profit estimates for TI remain on an upswing. Better yet, the stock price hasn’t yet caught up to the improving outlook. TI trades at less than 10 times projected 2010 earnings of $2.48 per share over the next 12 months. Texas Instruments is a Long-Term Buy.

Business breakdown

Most of TI’s semiconductors go into communications and computer equipment, though the company also provides chips for consumer, industrial, and automotive use.

TI operates four segments: analog (43% of revenue, 42% of net income for the six months ended June), embedded processing (14%, 9%), wireless (22%, 16%), and other (21%, 33%). The analog and embedded units should drive most of TI’s growth.

Analog semiconductors translate signals from the real world (such as sounds, images, temperature, and pressure) into data. A supplier for more than 80,000 customers, TI believes it holds a 13% slice of the $4.3 billion market.

The embedded-processing division makes products that perform mathematical calculations to manipulate digital data, or that control a set of specific tasks for electronic equipment. TI controls an 11% share of this fragmented, $14 billion market.

The wireless unit is undergoing a massive overhaul to improve profitability. TI’s traditional business makes baseband chips, which allow cell-phone users to connect to a wireless carrier’s network. But as competitive barriers tumble, baseband growth rates continue to slow. As a result, TI has quit investing in wireless modems and plans to exit the business by the end of 2012. In its place, TI is investing heavily in the application processors used in portable devices.

Finally, TI produces semiconductors used in high-definition projectors and calculators. It also licenses technology to other firms.

Conclusion

The analog and embedded businesses should gain additional share this year. Strong demand in China, a rise in computer orders, and higher demand for semiconductors in consumer products should support sales. For the September quarter, TI says it expects per-share earnings of at least $0.64 and revenue of at least $3.55 billion, implying minimum growth of 52% and 23%, respectively. On Sep. 9, TI will update its guidance.

A stock-repurchase program has reduced the share count by 4% in the past four quarters and 30% since the end of 2004. An annual report for Texas Instruments Inc. is available at 12500 TI Blvd., P.O. Box 660199, Dallas, TX 75266; (972) 995-3773; www.ti.com.

TEXAS INSTRUMENTS
Quarter

    Per-Share
     Earnings*

Sales
Change

      Quarterly
      Price Range

P/E Ratio
Range

Jun '10 $0.62 vs. $0.20 + 42% $27.44 -

$23.45

17 - 14
Mar '10 0.52 vs. 0.01 + 54% 27.00 - 22.28 23 - 19
Dec '09 0.52 vs. -0.21 + 21% 26.08 - 22.26 62 - 53
Sep '09 0.42 vs.

0.43

- 15% 25.33 - 19.43 59 - 45
           
Year
(Dec.)

Sales
 (Bil.)

Per-Share
Earnings*
Per-Share
Dividend

52-Week Price Range

P/E Ratio
Range

2009 $10.43 $1.15 $0.45 $27.00
-
$13.70 23 - 12
2008 $12.50 $1.57 $0.41 33.24
-
13.38 21 - 9
2007 $13.84 $1.83 $0.30 39.63
-
28.24 22 - 15
2006 $14.20 $1.69 $0.13 36.40
-
26.77 22 - 16
             
————————————————— Quadrix Scores † —————————————————
Overall Momen-
tum
Value Quality Financial
Strength
Earnings
Estimates
Performance
99 97 84 91 97 90 52

   * Earnings exclude special items.
   † Quadrix® scores are percentile ranks, with 100 the best.


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