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Don’t Mess With Texas
06/10/2008 12:00 am EST
Nikhil Hutheesing, editor of Forbes Wireless Stock Watch, says chip giant Texas Instruments is growing nicely and trading at its cheapest multiple in years.
Three years ago, I recommended that investors buy shares of Dallas-based Texas Instruments (NYSE: TXN) at $27.59 per share. TI, a leader in the booming wireless sector, supplies the chips needed for handsets that operate on GSM technology which is used in the most of the world and is offered by carriers such as T-Mobile, AT&T, and Vodafone.
TI puts its digital signal processors (DSPs) and other technology inside hundreds of millions of handsets each year. Another engine of TI's growth these days is coming from its analog chips, [which] are used to translate sound and temperature into digital signals that can be understood by computers. Analog is expected to grow by about 20% over the next five years [annually]. So, even though "analog" [means] "old" when it comes to buying a flat screen TV, it's critical technology for our digital future.
I also like TI's somewhat contrarian strategy to go after a declining market—the 2-2.5G market. While most of the excitement and new applications were being developed for new, high-speed 3G networks, TI figured it could continue to grow [the 2-2.5G] business significantly by creating low-end chips that also cost less to manufacture.
Recently, however, Wall Street has been very negative about the company [because] TI's biggest wireless customer, Nokia, announced that it would no longer depend mostly on TI for its chips, but that it would include other suppliers. LM Ericsson also said it had shifted to a multisupplier strategy.
And in April, TI’s chief executive officer Rich Templeton said that his company had become more conservative in its outlook for the second quarter. On that news, shares of TI fell 5%. The company also said that its cell-phone sales would be weaker [and that] it expected earnings per share of 42 to 48 cents a share, [below] analysts' projection of 48 cents a share.
But I think that the company will end up exceeding expectations in the second half. Orders for TI's chips are significantly higher for the second half than they have been in previous years. In fact, chip sales could rise as much as 18% in the second half compared to the first half of 2007. The typical increase in second-half sales is usually about 13%.
TI has a market capitalization of $41 billion and a price/earnings ratio of around 16x compared with 23x for Qualcomm (see “A Tech Star From the ‘90s Shines Again,” June 5.) Its enterprise value [is only three times] expected 2008 sales, vs. more than seven times for Qualcomm. In fact, most of TI's competitors are trading between three times and 6.4x 2009 estimated enterprise value/sales.
As a result, I am conservatively valuing TI’s enterprise value at five times 2009 estimated sales. At [that multiple], you get a price target of $52 per share. (It closed above $31 Tuesday—Editor.) For those who have not invested in the stock, now is a good time.
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