Texas Instruments Takes a Hit

Shares of the semiconductor outfit fell Wednesday after it tightened its 2007 revenue estimates

Shares of Texas Instruments (TXN) fell 1.6% to $35.16 on Sept. 12 as investors expressed disappointment that the company didn't raise its revenue forecasts for the year.

But the market's preoccupation with the near-term results seemed to ignore the chip manufacturer's longer-term prospects for margin growth as it continues to build its distribution network for more profitable analog products.

After the close of trading Sept. 11, the Dallas-based company said it was leaving the midpoint of its total revenue estimate for 2007 unchanged at $3.64 billion, but narrowed the range to between $3.56 billion and $3.72 billion from a prior range of $3.49 billion to $3.79 billion. It also reaffirmed $3.43 billion as the midpoint of its projected range for semiconductor revenue but tightened the range to $3.36 billion to $3.50 billion from an earlier range of $3.29 billion to $3.57 billion. The company stuck by its expected range for education technology sales of $200 million to $220 million.

Texas Instruments bumped up its forecast for earnings from continuing operations to between 49 and 53 cents a share from 46 to 52 cents a share. The new estimate includes a projected two-cent gain on the sale of its semiconductor product line associated with DSL customer-premises equipment, which closed in July.

The essentially unchanged sales outlooks didn't please investors who have watched a few of the company's rivals such as Intel Corp. (INTC) and Seagate Technology (STX) raise their profit projections recently on higher demand.

Texas Instruments' order trends in the third quarter have risen above those in the second quarter, driven by demand for high-performance analog and wireless products, A.G. Edwards & Sons (AGE) said in a Sept. 11 research note.

The fact that the company didn't raise its sales forecast and its mixed comments on wireless suggests it isn't seeing any significant pickup in business from Motorola (MOT) as a result of Motorola's clearing excess wireless handset inventory, A.G. Edwards said. (A.G. Edwards owns a long position in the company's stock.)

But continued strength in Nokia cell phones will help to offset weakness in Motorola and other handset makers, with lower inventories and higher demand adding muscle to Texas Instruments' key end-markets, Jefferies and Company (JEF) said in a Sept. 12 research note. And while the company cited weakness in wireless infrastructure, Jefferies said the strength of the handset – particularly 3G high-end type – and analog markets could end up boosting profits for the third quarter. In addition, the company's high performance analog, or HPA, business remains strong, generating profit margins that are higher than the corporate average, Jefferies said.

In its Sept. 12 research note, Piper Jaffray & Co. (PJC) said an improving mix of HPA revenue will continue to push gross margins higher. The company's distribution channels continue to be a key reason for its analog success and its efforts to further expand distribution channels for higher-margin analog products are likely to boost the stock price, Piper Jaffray said. (Piper Jaffray makes a market in Texas Instruments' stock.)

Despite the fact that distributors and original equipment manufacturers are nervous about holding inventory due to recent warnings about an economic downturn, end-market sales remain solid, the firm said.

While demand for Texas Instruments' wireless products is still lower than expected, Standard & Poor's said it believes orders will eventually improve and complement improving analog orders. The equity research unit cut its third-quarter and full year earnings estimates by a penny, projected a profit of $1.82 a share for 2007. It reaffirmed its strong buy rating on the stock and kept its 12-month target price at $44 a share. (Standard & Poor's, like BusinessWeek, is a division of McGraw-Hill Companies (MHP).)

Over the longer term, Texas Instruments is set to benefit from an improving mix of feature-rich phones that should drive demand for TI 3G baseband solutions, OMAP processors, and analog products, the Piper Jaffray note said. And although the company will face greater competition from STMicro (STM) and other silicon vendors as Nokia (NOK) continues to diversify its 3G supply chain, Texas Instruments' role as Nokia's primary supplier and its increased share within Motorola will allow it to continue to dominate the 3G baseband market, Piper Jaffray said.

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