Whenever you look at yourself in the mirror and ask questions that you already know the answer to, more often than not, your mind has already been made about what the next step is. I have recently found myself doing this quite a bit recently. No, it's not cause for concern, but rather it is my way of rationalizing my decisions and sorting through some possible outcomes. Last week in an article, I asked can chip giant Texas Instruments (TXN) still grow and yet be expensive? Though I'm still bullish on the company and its long term potential, the question was necessary for a number of reasons - not the least of which is the fact that I thought it was time to exit my position.
Appraising Texas Instruments
With the stock currently trading at $33 per share and a P/E of 17, the term "pricey" comes to mind from the standpoint of its current cash flow valuation as well as its earnings. As a means of comparison, market leader Intel (INTC) trades at $26 with a P/E of 11 - to me this presents significantly more value. Whereas Qualcomm (QCOM) that trades at a P/E of 23 might suggest that Texas Instruments may not be that expensive at all. But nevertheless, I am not suggesting that Texas Instruments should now be avoided or that it cannot continue to grow into its valuation. But rather, from the standpoint of appraisal, there are likely better chip alternatives at this time.
A few months ago when Texas Instruments 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 and Atmel had experienced similar concerns. But more importantly, the fact that other tech companies outside of the sector - such as Cisco (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 more broad than what I initially thought. Since then however, and to its credit, the company has reminded investors of why it remains one of the best run techs on the market.
In its latest report, 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.
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 (AMZN), Research In Motion (RIMM) and more importantly Apple.
Overall the numbers were pretty good, but I say this with the understanding that the company had beaten numbers that it had previously guided down to while also realizing the fact that the fourth quarter included additional revenue from the acquisition last year of National Semiconductor, which was completed for $6.5 billion. At one point this year the stock had gained 20% from its 2011 close. I am happy to take those gains and wait for a better re-entry point to Texas Instruments once its multiple comes down a little bit - preferably in the 12 to 15 P/E range.
Additional disclosure: Author plans to exit TXN at the open on Tuesday morning.