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It is no secret that I have become an unabashed cheerleader of chip stocks lately for no other reason than their association with Apple (NASDAQ:AAPL). Aside from my love affair with names such as Qualcomm (NASDAQ:QCOM) and Atmel (NASDAQ:ATML) the one chip that I can't seem to get eyes off of is Texas Instruments (NASDAQ:TXN). Over the past five months, you would be hard pressed to find a hotter stock - not named Apple. It's no coincidence that each of the names so far in this article have been trending higher during that same span. For Texas Instruments in particular, the stock has surged 33% since early September to where it sits now at $33 per share.

This has caused many to ask, is the stock now expensive when taking into account its recent earnings and free cash flow valuations? However, when I look deeper into the company's business and supported metrics, I continue to see considerable value. And recently, it demonstrated precisely what I have previously uncovered during its recent earnings announcement. Now I say this with some hesitation because it is also fair to say that its numbers had been previously guided down due to weakness in technology spending.

However, (and more importantly) the fact that other tech companies outside of the sector - such as Cisco (NASDAQ:CSCO), which does a lot of business within chips - had also shown sharp declines in sales due to similar reported weaknesses, this sent a signal to me that the issue was not entirely specific to TI but rather an issue involving the broader sector as a whole. But today, seeing as there appears to be a slight uptick in IT spending, it might be time to anticipate that a bottom on both issues has been reached.

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% 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.

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%, with earnings per share growth of more than 31% 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.

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.

Summary

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 33% over the past five months and 20% so far on the year, there is plenty of room left for the stock to continue its surge upward. Texas Instruments remains a buy and should see the $40 at some point during the year.

Source: Texas Instruments: Can It Still Grow Yet Be Expensive?