Texas Instruments' Narrowed Guidance Range Not Bad

Sep.13.12 | About: Texas Instruments (TXN)

Semiconductor firm Texas Instruments (NYSE:TXN) updated its third quarter guidance range Tuesday afternoon. The company narrowed its revenue guidance range to $3.27 billion-$3.41 billion from its previous range of $3.21 billion-$3.47 billion, the midpoint approximately in-line with the consensus estimate of $3.34 billion. Earnings per share will likely be between $0.38-$0.42, at the high end of its previous range of $0.34-$0.42 and in-line with the consensus estimate of $0.38. For an extensive analysis of Texas Instruments valuation' both on a DCF and relative value basis, please click here.

The firm's guidance is a clear departure from Intel (NASDAQ:INTC), which slashed its outlook last week. Texas Instruments isn't nearly as leveraged to the PC market as its large competitor, but management also acknowledged substantial weakness from all computing except tablets. In the tablet and smartphone market, management expressed frustration about the trend toward vertical integration from the two largest players-Apple (NASDAQ:AAPL) and Samsung. We think this trend is hurting all industry players, but we also believe firms like Qualcomm (NASDAQ:QCOM) are simply providing better chips and winning market share.

On top of its smartphone business looking less attractive, management noted that weakness in Chinese infrastructure spending will negatively impact its communications infrastructure segment. Again, with all of the weakness we've seen recently in the region, this comes as no surprise. However, we remain bullish on the long-term prospects of infrastructure spending in the growing nation.

Though we were encouraged by the narrowed guidance range (as it was not cut), the company noted that a favorable one-time impact driven by a $60 million insurance payment from the Japanese tsunami last year will add about $0.01 to earnings in the period. The company's focus on tightening internal discretionary spending controls and lowering the amount of recent college-graduate new hires will result in an additional $0.01 of cost savings in the quarter.

After reviewing the update, we didn't hear anything that would make us change our expectations for the firm. Though the company is a cash cow, we believe shares are fairly valued at today's levels, and its score on our Valuentum Buying Index (our stock-selection methodology) of just a 3 suggests shares won't make a good addition to the portfolio of our Best Ideas Newsletter.

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Additional disclosure: Some of the firms mentioned in this article are included in our actively-managed portfolios.