Why Texas Instruments Will Trade At $40

Jan.31.12 | About: Texas Instruments (TXN)

A few months ago when Texas Instruments (NYSE:TXN) revised down its fourth quarter guidance, I wasn't sure exactly what to make of the reasons it offered. It cited an overall chip weakness within the market. While not entirely specific, it did cause me to look a bit closer at the overall chip sector where competitors such as Intel (NASDAQ:INTC) and Atmel (NASDAQ:ATML) had experienced similar concerns. But more importantly, the fact that other tech companies outside of the sector, such as Cisco (NASDAQ:CSCO) - which does a lot of business within the sector - had also shown sharp declines in sales due to similar weakness was a signal that the issue was neither unique to chips nor specific to Texas Instruments, and it might be time to anticipate a bottom on both.

The quarter that was

Last week upon the release of its Q4 and full year earnings results, it was once again time to assess the company's outlook after having seemingly made a correct bet. I say this knowing pretty well that the company beat expectations that it had lowered a month prior. The fourth quarter included additional revenue from the acquisition last year of National Semiconductor, which was completed for $6.5 billion.

Analog chip sales, where it leads in the market, continued to account for the majority of the top line and climbed a respectable 7 percent to $6.4 billion. But it was not the fact that it exceeded those numbers that should excite investors, but the fact that it put forth an outlook that implies that the company should be able to rebound from a disappointing 2011. And several analysts agree and cited the fact that inventory correction within the overall chip industry is now over.

2012 outlook

For the coming year, analysts are projecting modest sales growth and total sales of nearly $13.9 billion. The consensus earnings projection for 2012 is currently $1.89. This trend may likely pick up by the end of the year leading into 2013. By then totals are expected to approach the area of $15 billion for annual growth in excess of 8 percent, with earnings per share growth of more than 31 percent to $2.48 per share. As noted previously, the company is well in position to capitalize from its partnerships with Amazon (NASDAQ:AMZN), Research in Motion (RIMM) and more importantly Apple (NASDAQ:AAPL).

For further evidence of why Texas Instruments should be considered, recently Canaccord Genuity technology analyst Bobby Burleson noted that he expects to find more evidence of recovery in the semiconductor field. Mr. Burleson also added the following:

Based on improving conditions in the supply chain, we believe semiconductor stocks are likely to trade higher near term as investors begin to bake in a more substantial recovery by Q2. We are overwhelmingly BUY rated on the group, with a particularly positive stance on names with potential for rebounding margins, improving dividends, and product cycles in counter cyclical drivers like.

I have no choice but to agree with Mr. Burleson on this. But I can also concede while I am pretty bullish about the company's prospects, it is not entirely void of risk - and that really goes for all semiconductor stocks.


There are many who will proclaim that at $32, the stock is relatively expensive at current levels when comparing its recent earnings and free cash flow valuations. However, investors who were aggressive and bet correctly when the company issued its warning in the fourth quarter of 2011 are glad that they did as 2012 looks extremely promising. Though the company continues to be on an impressive run by climbing almost 20 percent on the year so far, I still maintain my near-term price target of $35 and a 12 month target of $40.

Disclosure: I am long TXN, CSCO, ATML, RIMM.