Hi Jacob, I agree with pretty much all of your post.
I understand that PE can be meaningless when a company is in a temporary earnings drought. In such times it is useful to look at price/sales and price/future earnings where future earnings is at least a year out.
The analyst concensus earnings for TXN for yr ended Dec 2002 are assuming positive revenue growth. I doubt that will happen but I gave TXN the benefit of the doubt by saying that a P/S of 1 would give a price of $6. (I am not predicting that will happen - just saying that if it did then it would be a buy as I was responding to a question of where I would buy TXN).
I know TXN does certain things better than its competitors, and that it has a patent portfolio. It does however have competition, and not just from foundries. This time last yr, mobile phones came from Nokia, Ericcson or Motorola, and many had TXN DSPs in them. These days, the likes of Siemens and Samsung are in on the act. Not only does the competition mean extra capacity and therefore lower prices and margins that filter down to the component suppliers, but these additional manufacturers are also competitors of TXN in the DSP space.
TXN isn't just about DSPs. It is also a foundry. Foundry capacity utilisation rates do make a difference to TXN's top and bottom line.
Where I disagree with you is the likelihood of earnings increasing for semi companies anytime soon (with the exception of Intel due to scarcity of competition). We are not just dealing with a bubble in terms of investment in the stock market, but also investment in high tech industry, especially semiconductors. Supply and demand dictates that as the capacity of the suppliers increases, the profits go down or disappear until enough companies have left the industry.
While stocks are valued at several hundred times next year's earnings and with P/S ratios of 8 - 10, there is no incentive for companies to leave the industry, they just issue stock or notes to make up for operating losses. In other words, there can be no recovery until stock prices fall. I know that TXN does not have a balance sheet like Polaroid, but how long can it remain that way if it keeps turning a loss?
Finally, if TXN was that special that it is immune from competitive pressures, why did they make a loss last Q, and the Q before, and next Q, and the Q after? The unit shipments of DSPs hasn't fallen that much; the damage is done by a decline in the selling prices - and they are dictated by competitive forces. |
