Texas Instruments Earnings Beat Was Priced In

“Let’s go through this because this is a very good report for this company. No question about it. You went through the headline already the 20 cents against the 18-cent estimate. So TI did beat by two cents and now, keep in mind, that expectations were fairly high going into this report. Lots of optimism around these and it appears right now that Texas Instruments is in fact able to deliver. Revenue of $2.46 billion against the $2.4 billion that Wall Street was anticipating. And most of the analysts that I spoke to earlier today said that this company indeed had to beat …” CNBC’s Closing Bell 7/20/2009

Texas Instruments Incorporated (NYSE:TXN) reported second quarter results that were by all accounts better than anticipated. The company reported 20 cents in profit which beat estimates, and the results were five cents better when taking away one time restructuring costs. Sales improvements from last quarter were a bright spot as sales of analog chips rose 21%, and wireless processors were improved by 9%. Furthermore the company offered guidance for the next quarter that topped expectations as well, while the street was expecting $.28 cents, they guided $.29 to $.39. However, so far after hours trading has shown very little enthusiasm for the successful quarter and TXN is trading about 1% lower since the close.

In my mind, there are two main reasons why the market has had a tepid response to the respectable quarter. For one, the market has bid up Texas Instruments shares over the last few weeks and months to the point that they were no longer particularly cheap. In just the last six trading sessions, TXN has rallied 15.5% which is nearly double the rally in the tech heavy Nasdaq of 8.7%. Furthermore, if you take a look back six months TXN has outperformed the Nasdaq by an even wider margin, 64% for TXN to 32.5% for the index. Six months ago, we would have told you that TI is Undervalued and has been unjustly been brought down by an unfavorable market climate, but that argument is much less appealing now, even after a improved quarterly performance. Now with the stock having appreciated about 65% from the lows, we have placed a Fairly Valued valuation on the shares until the fundamentals show further improvement.

The other reason that it seems the market is not totally impressed by the earnings beat, is that comparisons to a year ago show that TI is still in very challenging times. Certainly the sales results are encouraging compared to the awful performance last quarter but over the longer term sales trends are not especially bullish. Net income has dipped 56% from a year ago, and revenue was off by 27%. Orders declined 19%, and the company reduced inventory by 45% in the quarter to more closely reflect slumping chip demand. Clearly, Texas Instruments is not concerned about an aggressive ramp up in demand, which suggests sales may continue to be weak. The stock is no longer cheap by our methodology and is currently trading for 31x consensus earnings estimates for this fiscal year. When you compare these results to those of fellow chip maker Intel (NASDAQ:INTC), who beat estimates and sounded optimistic about the future, Texas Instruments is not quite as impressive.

Texas Instruments Earnings Beat Was Priced In

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