- JP Morgan notes that as they hoped, there were several signs of a bottom on the call. TI's semiconductor book-to-bill decreased from 0.92 in 3Q06 to 0.89 in 4Q06, the lowest in over five years and roughly in line with firm's 0.90 estimate. In addition, the company's capital expenditures and depreciation for 2007 are both below 2006 levels.
Although revenue appears close to a bottom, TI is not lowering its inventory as the firm had hoped. TI stated it should actually increase utilization rates keeping inventory roughly flat during 1Q07, which should raise its inventory to a record 84 days. Although the company believes this is prudent, the firm finds it difficult to accept record inventory in the middle of a downturn. As a result, they believe the stock is range-bound until TI "blows up" due to its aggressive guidance and record inventory, which should occur sometime later this quarter and result in TI lowering utilization rates and inventory and bottoming its margins. JPM is maintaining their Overweight as TXN is trading near trough valuations and believes the inventory issue should be cleared up within a couple of months.
Firm is lowering their C07 revenue and EPS estimates from $13.7 billion and $1.52 to $13.3 billion and $1.45 and introducing C08 revenue and EPS estimates of $14.5 billion and $1.85. TXN stock is trading at 3.3X its C07E sales, the low end of its range of 3X-5X sales. JPM believes gross margins are bottoming soon and as a result is reiterating their Overweight rating.
- Stifel notes that with a report that created a somewhat surprising positive share reaction, Texas Instruments delivered a modest upside to recently reduced December expectations and gave cautious guidance that fell well below consensus. Although TXN doesn't appear to be largely suffering from company specific issues, they do believe the macro environment causing the March quarter reset is more concerning than the positive after hours trading might reflect.
Unfortunately, TXN's March quarter outlook suffers from the same industry issues that led to its negative mid-quarter update. In addition to revenue and EPS guidance, TXN made statements regarding inventories and factory loading which may ultimately have a larger impact on the company's shares than any near-term estimate revisions. Gross margin in the December quarter was 50.5%, a decrease of approximately 90bps sequentially, which was a lesser contraction than the firm had anticipated as the firm appears to have maintained a relatively high utilization rate. As a result of softer sales and relatively high production rates, the company's internal inventory decreased by only about $50 million sequentially.
For the March quarter TXN was indefinite as to what to expect regarding internal inventory balances as production would lessen during the first half of the quarter and then increase in the second half.
In firm's view, TXN is betting that the industry begins to return to normal by the second quarter and is relying on the flexibility of its hybrid manufacturing strategy to minimize the impact if orders remain sluggish. In the end, the risk of not having enough product may be greater than having too much inventory. However, at least until visibility shows some signs of improvement we stress
the potential repercussions to gross margin and profitability for much of 2007 should slower sales drive a need to again attempt to reduce internal inventories later in the year. Accordingly, they maintain their Hold rating.
- UBS notes TXN experienced broad-based weakness during Q4 in most of its end-markets including Wireless, DSP and Analog products. TXN's management commented that orders received in October and November were well below expectations, as it indicated during the mid-Q update, while orders stabilized in December, though at a low level. Book-to-bill came in at 0.89, down from 0.93 in Q3. Based on future expectations, TI indicated it has decided to start increasing wafer starts again during Q1, indicating to us that we have passed the trough. According to the company, weak demand in the high-end wireless segment could not be compensated by the solid low-end demand. Management reiterated that the company's LoCosto single-chip solution for the low-end handset market is ramping on track with expectations and is going well based on manufacturing yield performance. Firm expects LoCosto to start contributing to margins in 2H07 at the end of which LoCosto is expected to represent over 50% of all low-end handset shipments at TXN.
Firm continues to see valuation support for the TI shares and believes the market has largely priced in current weak fundamentals and is underestimating the potential for a solid rebound in 2H07, partly supported by LoCosto. At 14x 2008E EPS they view the shares as inexpensive and reiterate Buy rating as they believe the trough is near. Maintains PT of $38.
- Bear Stearns says they expect the mix shift towards low end cell phones to continue in 1Q07 as 3G cell phone demand remains weak. Though TI has been combating this mix shift with LoCosto, its wireless revenues continue to be pressured by the lower dollar content in these low end cell phones. It is difficult for the firm to call a bottom here on wireless as mix remains unfavorable for the foreseeable future and competition is intensifying in OMAP.
Outside of wireless, they see continued weakness in analog for 1Q07 as distributors are looking to further reduce their inventory on hand though checks indicate limited inventory builds across the supply chain. With decent sell through, they expect the current analog inventory correction to end exiting 1Q07.
This round of earnings reduction, in firm's opinion, was already priced into the stock. They reiterate the view that investors with an intermediate term time horizon should accumulate TI's shares at $29 and below given the improving risk/reward profile. However, for the near term, they expect TXN to trade sideways given the lack of immediate catalysts.
Notablecalls: It could have been worse. Management is now betting on a H107 rebound by not reducing inventory. If the rebound fails to materialize, it's going to be ugly. Currently, I see very little reason for a rebound to happen. I fully expect the stock to react positively in the s-t but the move will be faded later on.
TXN 1-yr chart: