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Don't Mess with Texas
11/04/2010 11:41 am EST
Charles Carlson, editor of the DRIP Investor, says giant chip maker Texas Instruments has great price and earnings momentum, invests heavily in research, and even pays decent dividends.
Texas Instruments (NYSE: TXN) was roughed up pretty badly in 2008 and 2009. Profits fell sharply for this semiconductor giant, as did the stock price. Shares plummeted from nearly $40 per share in 2007 to $13 in early 2009.
The stock has come roaring back from the 2009 lows, paced by impressive rebounds in sales and profits. For 2010, Texas Instruments should post record per-share profits in the vicinity of $2.47 per share. Based on that estimate, the stock seems cheap at less than 12x earnings.
Most of Texas Instruments’ products are used in communications and computer equipment. The fi rm operates four segments: analog semiconductors, embedded processing, wireless, and other. Analog semiconductors translate signals from the real world (temperature, sounds, etc.) into data.
The embedded-processing division makes products that perform mathematical calculations to manipulate digital data or control a set of specific tasks for electronic equipment. Texas Instruments is shifting emphasis in its wireless market away from wireless modems to application processors used in portable devices.
Texas Instruments spent nearly $1.5 billion, or more than 14% of 2009 revenues, on research and development, which bodes well for a flow of new products. Strong profits and a healthy balance sheet should continue to fund innovation.
At midyear, the company had $2.3 billion in cash and investments and no long-term debt. The strong finances and cash flow should fund additional dividend increases. The company recently boosted its dividend 8% to a quarterly rate of 13 cents per share, payable November 22nd. The current payout ratio, based on 2010 earnings estimates, is just 21%, so there is plenty of room to boost the payout. The stock’s current yield is 1.8%.
Texas Instruments also plans to use its cash to buy back stock. The company recently authorized the repurchase of an additional $7.5 billion of its stock. That amount represents roughly 22% of the company’s entire market capitalization, [and] is in addition to the $1.3 billion in buyback authorizations remaining at the end of June.
True, Wall Street seems to be increasingly concerned about chip stocks, fearing a technology slowdown later this year will trim demand. And that caution has limited earnings-multiple expansion for chip stocks such as Texas Instruments.
However, a solid fourth-quarter showing should be enough to push these shares above $30. The stock is a Buy for investors seeking a technology stock with both operating and price momentum. (It closed Wednesday at around $30—Editor.)
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