Texas Instruments' Investments Are Bearing Fruit

Texas Instruments invested in chipmaking capacity and equipment during the depths of the recession, setting the stage for a rebound in sales that Chief Executive Officer Rich Templeton touted at a May 6 meeting with financial analysts in New York.

In April 2009, Texas Instruments (TXN) announced it was ramping up production at a newly built 800,000-square-foot testing and assembly plant in the Philippines. In August, the Dallas chipmaker bought manufacturing equipment from bankrupt chipmaker Qimonda, a spin-out from German semiconductor company Infineon Technologies (IFX:GR), for a bargain-basement $172.5 million. The same equipment new would have cost about $1 billion, Templeton said. "We have usually been happy when we have invested countercyclically," Templeton told analysts. "It turns out to be one of the best decisions that we've made."

The bets TI placed during the downturn are paying dividends. After six straight quarters of decline, Texas Instruments' sales have grown in its last two quarters. On Apr. 26, TI reported first-quarter profit rose to $658 million, or 52 cents a share, from $17 million, or a penny a share, a year earlier. Sales climbed 54 percent to $3.21 billion.

TI has forecast its second-quarter profit to be 56 cents to 64 cents a share on sales of at least $3.31 billion. That forecast beat what analysts had expected would be a profit of 53 cents a share and sales of $3.23 billion, according to a Bloomberg survey. Templeton did not issue new guidance in his remarks on Thursday.

TI shares closed May 6 down 80 cents, or 3 percent, at 25.07. The shares have gained more than 51 percent since reaching a 52-week low of 16.57 on May 12, 2009.

Expansion of Manufacturing Capacity

Texas Instruments has been building and buying manufacturing capacity to help it tap into growing markets. The company has been losing share in the overall market for semiconductors because its business of selling chips for traditional cell phones, or baseband chips, is shrinking, analyst Doug Freedman of Broadpoint AmTech (BPSG) said. TI has been expanding its capacity for making embedded chips used in smartphones and analog chips that appear in everything from washing machines to supercomputers. "They're gaining share in higher-value portions of the market," says Freedman, who has a buy rating on TI shares. "A lot of those share gains have been through acquisitions and the leveraging of technology that they…bought for a song," he says.

Analog chips account for 43 percent of TI's sales. A new factory in Richardson, Tex., uses 300-millimeter wafers that can turn out more chips per wafer than older 200-millimeter technology. The factory is expected to begin shipping chips in the second half of this year. Templeton told analysts in New York that the factory is capable of producing $2 billion worth of chips each year. The Philippines plant, when fully operational, will be able to turn out 12 billion chips annually, Templeton said.

TI estimates the overall size of the analog chip market at $32 billion. "I challenge you to find any equipment that doesn't have some kind of analog [chip] in it," Templeton said. "We have an opportunity to sell some kind of product to literally every customer in the world."

For TI, an indicator of overall demand for consumer electronics, adding manufacturing capacity in 2008 and 2009 carried risk, since an absence of demand once the economy recovered could have left plants idle, analysts said. Jim Kelleher, an analyst at Argus Research who has a buy rating on TI shares, said in a Mar. 4 research note that the bold investments have borne fruit. "A handful of technology companies, most notably Cisco [Systems] (CSCO), but also companies such as TI, used their strong financial resources at the worst hours of the recession to make themselves stronger for the recovery period," he wrote.

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