The Long Case for Texas Instruments (TXN)

| About: Texas Instruments (TXN)

Over the course of my 10-year career covering tech stocks, I have always been amazed how the sell-side community continues to issue earnings estimates for stocks so far into the future. As a user of these estimates, I have never put much faith into any earnings estimates over three quarters out.

This brings me to my problem of the day. Thursday night, Texas Instruments held a rather impressive mid-quarter update conference call in which the company raised their revenue and earnings estimates for the quarter. The company cited strength in wireless and their DLP segment among other things. All in all, I thought it was a very respectable conference call in what has become a very tough environment for tech stocks.

However, Friday morning more than one analyst issued notes that seemed overly negative in my opinion. One, Citigroup's Glen Yeung, suggested that handset levels in China were growing and actually took down his estimates for 2007 and 2008. Bear Stearn's Gurinder Karla suggested that TXN's wireless business (30% of sales) could slow this month and advised clients to wait for a better entry point on the stock.

I think Friday's weakness provides that entry point. This doesn't mean that the stock couldn't drift a little lower, particularly if the tech tape continues to trade like it has, but given the stock is off about 20% from its recent high, I think the risk/reward is pretty favorable.

TXN is executing extremely well, its customers such as Nokia (NYSE:NOK) are doing alot better, the company's DLP business should continue to grow and margins should continue to expand. All told, I think the fundamentals are still quite favorable and at 18X forward earnings estimates, I think the valuation is quite compelling.

The problem that you run into is that this group is the playground to so many fast money types. They can't stomach owning a group during a seasonally weak period. Also, any prolonged weakness in the overall economy will hit the semiconductor group hard because, as we have all learned over the past few years, semiconductors are indeed cyclical.

However, if you can be patient, I would consider TXN a core position and believe that the long term investor will be nicely rewarded at these levels. I think the stock could trade to the $36-$38 level over the next 12 months which would equate to a 20-25% return.

Disclosure: The author is long TXN

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