...and Betting on a " Digital Future"

07/15/2005 12:00 am EST

Focus:

Nikhil Hutheesing, also a fan of Qualcomm's (see above), looks toward Texas Instruments as his latest recommendation on the wireless sector. Here, he looks at the company, which he notes, "has bet its chips on communications" and has a "bright digital future."

"Texas Instruments (TXN NYSE) has an illustrious yet complicated history. But the key to its success has been its ability to know when to get out of certain businesses, and when to move into new ones. As a result, Texas Instruments, which turns 75 years old this year, has reinvented itself countless times. I recently met with Texas Instrument’s chief executive, Rich Templeton, during the Lehman Brothers Worldwide Wireless and Wireline Conference, and the firm's mission is clear: it has bet its chips on the explosion of communications and entertainment.

"TXN is taking its sophisticated technology and bundling the functions together onto just one chip. Of course, taking the work of several processors and putting them onto one is no easy task. But TXN can do it because the company has its own processes and its own fabs. It can make chips in-house, but also elsewhere. It can integrate particular functions into its chips such as Bluetooth or Wi-Fi. Its single chip DRP technology, which is also known as the 'Hollywood Chip' should be a real winner for use in lower end value handsets. The chip allows for digital television service on a handheld, a service which should become available in early 2006.

"Texas Instruments, of course, is doing a great deal outside of wireless. One of its biggest growth drivers is the digital light processor (DLP) chip for high-definition televisions. The DLP chip, which is an optical semiconductor that digitally manipulates light, can be used in a wide array of consumer electronics including video jukeboxes, digital cameras, and MP3 players. Its Digital Cinema business allows for the all-digital distribution and projection of movies. Here, a digitized movie is stored on a server that 'serves' it to a digital projector for each screening of the movie. By the end of the first quarter, the company’s DLP chip was in 75 different TV products, including Samsung, Panasonic, and Toshiba.

"Even though shares of Texas Instruments now trade near their 52 week high, the stock looks attractive as TXN’s prospects keep improving. Management seems to agree. During the first quarter, the company used $1.5 billion to repurchase 58 million shares. The company has allocated about $3 billion for stock buybacks. I think TXN is a buy at current levels and I am adding it to my core portfolio. I expect second quarter numbers and the remaining half of 2005 to be strong and that should help to drive the stock price higher. Since the company’s expected earnings per share in 2006 is $1.36 per share, my target for shares of TXN in 2006 is $41 per share. Texas Instruments is clearly a company with a bright digital future."

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