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Summary

  • The recent growth in earnings has been the result of cost cutting.
  • When you factor in the company's share repurchase program, very little of the earnings performance have been organic.
  • If the stock wasn't already trading at such a premium, performance expectations wouldn't matter. But these shares presume perfection.

Every once in a while investors will come across a company with a strong brand with a seemingly solid market position, but for one reason or another that same company appears to always play catch-up within its own sector. Texas Instruments (NASDAQ:TXN) serves as a perfect example.

As rivals are ramping up product portfolios and positioning themselves to capture market share, Texas Instruments appears stuck figuring out ways to reverse its revenue slide, which has now raised concerns about its expensive stock price. Based on Monday's closing price of $46.11, Texas Instrument stock now trades at a forward P/E of 22, which is 8 points higher than the industry average.

While I have always liked Texas Instruments, persistent revenue declines have kept me at bay. In the company's fourth-quarter report, although revenue was up by 1.6% year over year, the company's posted a 7% decline on a sequential basis. Plus, distributor resales also dropped 3% sequentially, which reflected further burden on the company's revenues. In terms of profitability, gross margins declined 68 basis points sequentially to 54.2%. This was due to lower volumes.

On a segmented basis, the 12% combined growth from its analog and embedded processing business, which now makes up more than three-quarters of the company's revenue, has to be looked upon as a relative disappointment. I suppose a case can be made that the results were in line with expectations.

Even then, when you look at it on a sequential basis, Texas Instruments posted 3% and 10% declines, respectively, in analog and embedded revenue. Plus, when looking at the full-year's results, total revenue was down 5% year over year. At best, the results were mixed.

So what's an investor to do?

Last month, the company announced another round of layoffs, which suggested that Texas Instruments may be exiting the embedded processing market. Analysts applauded the potential cost-savings by sending TI shares higher. But it's going to take much more than cost-cutting measures for Texas Instrument stock to outperform in the long terms.

After having exited the mobile/wireless market and ceding that industry to Qualcomm (NASDAQ:QCOM) and Broadcom (NASDAQ:BRCM), management needs to show that it plans to remain competitive. And it will begin Wednesday when Texas Instruments announces its first-quarter results.

Analysts will be looking for 41 cents in earnings per share on revenue of $2.96 billion. Earnings are projected to grow by 28% year over year, while revenue is projected to grow by 2.5%. Recall, management has guided for revenues around $2.30-$3.07 billion. The earnings per share are expected in the range of 36 cents to 44 cents. But as noted, the growth in earnings has been the result of cost cutting. And when you factor in the company's share repurchase program, very little of the earnings performance have been organic.

Once the entire semiconductor space fully recovers, Texas Instruments' numbers should also improve. At least that's the logical assumption. But it also assumes that rivals like Intel (NASDAQ:INTC) and NVIDIA (NASDAQ:NVDA) will make no competitive advancements at all. Not to mention, Qualcomm and Broadcom. But based on the company's valuation, Texas Instruments is still getting the benefit of the doubt.

The good news is, the company maintains a strong balance sheet. With close to $4 billion in cash on the books, Texas Instruments will have no problems running its business. But how long are investors willing to wait for confirmation that they have placed the right bet?

If the stock wasn't already trading at such a premium, performance expectations wouldn't matter. But these shares presume perfection. And until management can get revenue heading in the right direction, it's time to sell Texas Instruments and turn your attention to Intel or Nvidia, which appear more focused and present better value.

Source: Sell Texas Instruments Ahead Of Earnings