They say that sometimes it is better to be lucky than good, but in the stock market, every so often we realize that sometimes it is best to just trust your instincts than wait for the facts to emerge. I'm not talking about just randomly "jumping the gun" absent (any) supported data. But rather, acting and making decisions sometimes based on nothing other than a gut feeling.
On Tuesday, I talked about why it might have been time to exit my position in chip giant Texas Instruments (TXN) in favor of another giant Broadcom (BRCM). But my premise was simple - it was not that I had suddenly turned bearish on the company, but rather, my calculations had indicated that the stock had gotten expensive on the concerns that I felt it would be tough for it to sustain the growth necessary to support its P/E. What I said then was as follows:
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.
I felt it was time to be a bit more conservative even though for the coming year, analysts were projecting modest sales growth and total sales of nearly $13.9 billion, bringing consensus earnings projections for 2012 to $1.89. There continues to be some optimism that the trend may likely pick up by the end of the year leading into 2013 which will then bring expected totals to approach the area of $15 billion for annual growth in excess of 8%. It was in fact these considerations that once prompted me to set a $40 price target on the stock. But since last week, these thoughts begin to shift which led to my sell earlier this week. But doubt still remained as to whether or not my caution was pre-mature - until news arrived Thursday afternoon.
On Thursday, the company lowered its guidance for first quarter earnings citing lower demand for wireless products. Texas Instruments says that it now expects profits for the first quarter to arrive between 15 to 19 cents per share - lower than the 16 to 24 cents that it had previously forecast. While doing so, it also cut its quarterly revenue expectations, where it now expects revenue in a range of $2.99 billion to $3.11 billion, compared to previous estimates of $3.02 billion to $3.28 billion.
It's hard to say that this news came as much of a surprise. As noted previously, I remain bullish long term on the company but for now, there are also much sexier chip names out there such as the aforementioned Qualcomm and Intel, but there is also Nvidia (NVDA) as well as Atmel (ATML) that represent (at the moment) relatively more value. But for Texas Instruments, it goes back to that cycle that apparently is going to take a bit longer than investors expected in terms of a recovery - slowness that started a few months ago when it first revised down its fourth quarter guidance while citing an overall chip weakness within 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.
As stated previously, I continue to be a long term bull on Texas Instruments and can see that it is a well run business. In the near term as its cyclical challenges get straightened out, this company will be a success. Value investors may consider adding the shares on weakness should they drop below $30 and or wait for its multiple to fall in the range of 12 to 15. Investors with longer term horizons don't have much to worry about and should still expect the stock to end the year on a high note at $40.