Global Economy Is Slowing: Texas Instruments Warning

| About: Texas Instruments (TXN)
Texas Instruments (NYSE:TXN), the world’s largest maker of analog semiconductors, cut its guidance for the third quarter of 2011. The company said it currently expects revenue in the range of $3.23 billion to $3.37 billion, compared to its previous outlook of $3.4 billion to $3.7 billion. This amounts to a 5% to 9% reduction in revenues in a single quarter, which is highly significant.
“The reductions are due to broadly lower demand across a wide range of products, markets and customers,” the company said in a statement.
Furthermore, Texas Instruments Vice President Ron Slaymaker said on a conference call that, “since this downturn is macro-driven, we really have no insight as to how long it will take.”
One notable aspect of the TXN warning is that 89% of the company’s sales come from outside the U.S. Thus, the macro slowdown that the company is referring to is a global macro slowdown.
Another notable aspect of the warning is that it was broad based and across all segments. Since TXN’s analog chips are components of products across a very large swath of goods in the global economy, this is also an indicator of broad-based economic weakness.
The notion that TXN’s revenue slowdown is macro-driven gains credence given profit warnings issued elsewhere in the semiconductor sector. On September 6, Altera Corp. (NASDAQ:ALTR), which makes programmable chips, said sales this quarter may fall as much as 3% from the prior period. The company had previously predicted an increase of as much as 6%. This is a highly significant 9% reversal in fortunes.
Fairchild Semiconductor International Inc. (NYSE:FCS), a competitor of TXN, also said on Sept. 6 that third quarter sales and profitability will fall short of its earlier forecasts. In a filing, the company said orders haven’t increased - as is normal this time of year - because some Asian customers are reducing their stockpiles of unsold chips.
Semiconductor demand is often a good gauge of economic activity because of the ubiquity of these devices in the goods and services consumed in today’s economy.
Last week, in an article entitled, “Next Week Is Critical For Shorts,” I highlighted possible revenue and profit warnings as a potential catalyst for further downside action in the S&P 500 (^SPX).
However, as detailed in that same article, the reaction to the news will be just as important as the news itself. For this reason, it will be important to monitor overall market action today to see if downside momentum will resume, or if the market has fully assimilated all of the bad news of the last couple of weeks.
Despite the fact that Microsoft (NASDAQ:MSFT), Apple (NASDAQ:AAPL), AT&T (NYSE:T), Verizon (NYSE:VZ) and Vodafone (NASDAQ:VOD) and even some financials such Goldman Sachs (NYSE:GS) look attractive at current valuations, I continue to believe that there will be better opportunities for purchases in upcoming weeks.
Please note that, on average, for the stocks listed above, and for the S&P 500 as a whole, well in excess of 30% of sales and 50% of profits derive from international sources. As detailed here, a global economic slowdown would hit the technology sector particularly hard.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
Additional disclosure: I am long SPX puts.