Earnings Scorecard: Texas Instruments – Analyst Blog

 

Texas Instrument’s (henceforth TI in this blog) first-quarter earnings jumped 461.2% from the year-ago quarter. However, given the momentum in the business over the last few quarters, most analysts had already revised their estimates. Consequently, the solid earnings beat the Zacks Consensus by only 3 cents.

 

Robust revenue growth, a better mix of business, cost control and good execution drove the results. All segments contributed to the increase, with the order book swelling again and lead times remaining pushed out beyond the normal 12-week range.

 

The solid quarter brought $710 million of cash into the coffers and prompted management to provide second quarter earnings guidance of between 56 to 64 cents a share, or up 130.8% from the comparable year-ago quarter.

 

 

Over the past 30 days, almost all of the 35 analysts covering the stock raised their estimates for the second and third quarters ending in June and September, respectively, as well as fiscal years 2010 and 2011. There were no downward revisions for any of these periods.

 

Thirty analysts raised their estimates for the June quarter, while 29 raised the same for the September quarter. Moreover, 32 analysts raised their estimates for fiscal year 2010, while 31 raised the estimates for the following year.

 

Analysts have forwarded a number of reasons for the positive revisions.

 

Most importantly, analysts feel that management has very successfully reduced focus on the commoditized wireless business (primarily basebands), turning instead to infrastructure-type markets with its analog/embedded processing product line. Management vision and an experienced Research & Development (R&D) team have made this possible. Analysts have noted that some of the competitors, for instance Intel Corp. (INTC) and Qualcomm Corp. (QCOM), have not been able to make similar adjustments. The refocus has enabled the company to play in markets characterized by more stable growth rates and stronger pricing.

 

The analog and embedded processing markets that have been identified as the core business have been performing extremely well and it is possible that TI has taken some share here. It is expected that growth rates in these markets will be sustainable in the foreseeable future.

 

Moreover, despite the refocus of R&D dollars, TI’s basebands are strongly positioned at Nokia (NOK), so a sudden customer loss looks unlikely. On the other hand, margins continue to benefit from the reducing contribution of wireless baseband chips.

 

Analysts are also positive about the new 200mm facility coming online later this year, since it would not only help more timely order fulfillment, but also enable TI to generate stronger margins on some high-volume products.

 

Lastly, analysts stated that channel inventory appeared lean and there was no evidence of cancellations although they did not comment on the possibility of over-booking.

 

 

Considering the many estimate revisions and the strong reasons driving them, the magnitude of revisions over the last 30 days is not surprising.

 

For the June quarter, estimates are up 8 cents to 61 cents, while for September, they are up 7 cents to 62 cents.

 

For fiscal years 2010 and 2011, estimates are up 23 cents and 25 cents, respectively, to $2.33 and $2.44, respectively.

 

 

The number of estimate revisions has raised the Zacks rank on TXN shares to #2 (short term Buy). Our top pick in the sector remains Linear Technology Corp. (LLTC), which currently has a Zacks Rank of #1 (short term Strong Buy), ahead of NVDIA Corp. (NVDA), STMicroelectronics (STM) and Intel Corp., all of which have been ranked #3 (short term Hold).

 

Although we generally agree with the analysts’ opinions, we are a bit more cautious on the stock. While TI does see very strong demand as evidenced by the order book, we wonder if the company will not lose some business. Management has assured that this has not been the case so far, but we believe the possibility cannot be ruled out, especially given the still-stretched lead times. Another concern is that of double-ordering. Given the fact that lead times have been stretching out for a number of quarters now, it is possible that some customers have ordered in anticipation of continued growth rather than in response to actual demand. If this is the case, there could be order cancellations further down the road.