Texas Instruments: Not Aggressive Enough

“Texas Instruments out with pretty good commentary. They raised their fourth quarter net outlook but it wasn’t that much and the stocks had a new high so you need more aggressive …” — CNBC’s Squawk on the Street 12/9/2009

Normally, when a company decides to go above and beyond the quarterly reporting and offer a mid-quarter conference call and lift guidance, it demands a bullish reaction from the market. However, after the close on Tuesday, Texas Instruments (TXN) management gave investors a view into their thus far solid quarter and the stock has sold off in reaction. TI narrowed the revenue and earnings guidance to the high side of the previous range, but neglected to raise the guidance substantially. For the third quarter, they expect sales of $2.90 billion to $3.02 billion, which improved from the previous forecast of $2.78B to $3.02B. Earnings per share should come in between $.47 and $.51 versus previous ranges of $.42 to $.50.

Even though the guidance was slightly better than consensus analysts’ estimates, there was nothing to really excite investors in the announcement and TXN has sold off nearly 2.5% as a result. Analysts have been raising estimates over the last few months because of the improved environment for chip stocks. So many investors were expecting Texas Instruments to show improvement that this appears to be a standard case of buy the rumor and sell the news. This same sort of thing happened for TXN nearly six months ago when the company reported an earnings beat and raised guidance following the fiscal first quarter.

The stock was trading near its 52-week high so clearly expectations were high, but at the currently price level and valuation are not a concern at this point. We currently have a Fairly Valued stance on TXN, even as this year’s sales have been weaker than we would have liked to see. Based on what the market has historically been willing to pay for a given level of revenue and cash earnings, our methodology suggests that anywhere in the range of $19 to $27 would be appropriate given current fundamentals. Based on this neutral valuation, we are not recommending buying shares at the current levels, and we can only imagine this sort of thing is getting pretty annoying to TI’s investors.

Texas Instruments: Not Aggressive Enough

About Ockham Research 645 Articles

Ockham Research is an independent equity research provider based in Atlanta, Georgia. Security analysis at Ockham Research is based upon the principle known as Ockham's Razor, named for the 14th- century Franciscan friar, William of Ockham. The principle states that a useful theory should utilize as few elements as possible, because efficiency is valuable. In this spirit, our goal is to make the investing environment as simple and understandable as possible, yet no simpler than is necessary.

We utilize this straightforward approach to value over 5500 securities, with key emphasis given to the study of individual securities' price-to-sales, price-to-cash earnings and other historical valuation ranges. Our long term value investing methodology is powered by the teachings of Ben Graham and it has proven to be very adept at identifying stock prices that are out of line with fundamental factors.

Ockham Research provides its research in a variety of forms and products including our company specific reports, portfolio analytics tools, newsletters, and blog posts. We also offer a white labeling research solution that can give any financial services firm their own research presence without the time and cost associated with building such a robust coverage universe of their own.

Be the first to comment

Leave a Reply

Your email address will not be published.