Barron's Weekday Trader
There's Hope for Texas Instruments Yet
by Lisa R. Goldbaum
Like many technology companies these days, semiconductor maker Texas
Instruments (TXN) didn't have much to write home about when it reported
first-quarter earnings Thursday.
True, the company managed to meet Wall Street's earnings forecast of 44
cents a share. But that was about the only good news it delivered, as a
slowdown in its commodity dynamic random access memory (DRAM) market
caused
revenues and orders in that market to decline from a year ago.
In fact, DRAM prices have tumbled a whopping 60% since last year, more
than
doubling Texas Instruments' losses in its memory-chip operations.
Weakness
in Asia and inventory reductions among TXN's customers caused total
semiconductor orders to fall 17% year over year, and the company itself
said worldwide growth in the industry would shrink to a meager "5
percent
or less" for the year.
But amid all this gloom and doom, at least some people on Wall Street
say
there are good times ahead for TXN. While management certainly didn't
hold
back about the industry's current problems, on Thursday Deutsche Morgan
Grenfell analysts Scott Nirenberski and Charles Glavin actually raised
their recommendation on the stock to Buy from Accumulate.
In an interview with Barron's Online, Glavin said he expects to see
improvement in several key areas of TXN's business over the next year.
For
one thing, he notes that TXN actually has reduced its exposure to the
cyclical and price-competitive DRAM business to only 12% of its total
revenues -- a big drop from 20% of revenues only six months ago--and he
expects the company to continue shedding underperforming DRAM
operations,
possibly getting out of that business altogether.
And since TXN's other businesses are much less commodity-driven and more
"value-added," that trend away from DRAMs would likely give earnings a
big
boost. Without the DRAM business, he believes TXN could earn $3.00 a
share
this year and $4.00 in 1999. That's a lot higher than the $2.31 a share
analysts now expect it to earn in 1998 and the $3.20 they project for
1999,
according to Zacks Investment Research.
Moreover, Glavin believes that the weakness in TXN's wireless and modem
businesses is coming to an end, which is important, since the two areas
combined represent nearly a quarter of the company's revenues, he says.
TXN
is the market leader in digital signal processors (DSPs), which convert
analog signals into a digital format. It sells them to modem
manufacturers
and cellular phone makers, among others.
But inventory gluts have plagued both those businesses this year.
Once-brisk sales of cellular phones to Asian countries have slowed
markedly
because of that region's financial crisis. Meanwhile, fast 56KB modems
have
gathered dust on store shelves as confused customers waited for
manufacturers to sort out yet another battle between two incompatible
industry standards -- one from 3Com and one from Rockwell and Lucent
Technologies.
Glavin now expects the recent agreement on a single industry standard to
spur new sales of higher-end modems, drying up the inventory glut and
jumpstarting that business's sales. (Manufacturers will be issuing
software
to make all existing modems compatible with the new standard.) He also
expects orders to pick up in the wireless area during the second
quarter as
Asia recovers. Even with all the price pressure in the DRAM market,
Glavin
said he was encouraged that the company's profitable non-DRAM businesses
helped TXN's overall gross margins grow nicely to 40.6%, from about 36%
last year.
For all these reasons, the two Deutsche Morgan Grenfell analysts have a
12-month price target of 70 for TXN stock -- nearly a 20% gain from
current
prices. The stock closed at 58 « Thursday, up 1 11/16 from Wednesday's
close.
And despite the discouraging tone of its earnings release, Texas
Instruments did suggest that the outlook for most of its business is
bright. "TI remains positive about the longer-term prospects of the
semiconductor industry," the company's statement said. In fact,
management
is looking for 30% growth this year in its DSP segment, which it
considers
one of its most important and promising businesses.
>From a longer-term perspective, the stock still looks pretty cheap. At
its
current price, TXN trades at roughly 18 times Zacks' consensus earnings
estimate of $3.20 per share for 1999 -- a big discount to its expected
growth rate for that year of 38.5% and a discount to its projected
five-year earnings growth rate of around 21%. And while the stock has
come
a long way from its 52-week low of about 39 1/2, it's still well off its
52-week high of 71 1/4.
Still, the short term may be rocky. In contrast to Glavin and
Nirenberski,
Brown Brothers Harriman analyst Bill Milton -- who had lowered his
recommendation on the stock to Short-Term Avoid from Short-Term Hold
just
last month -- responded to Thursday's announcement by cutting his 1998
estimate to $1.95 a share, from an already reduced $2.00. "1998 is
another
year that has to be written off because of memory pricing," he told
Barron's Online, pointing to the continued turmoil in Asia, excess
inventories and weakness in the modem and disk-drive industries.
That's all true, but if TXN continues to extricate itself from the doggy
DRAM business and manages to generate even better numbers in its faster
growing and more profitable sectors, then investors might eventually get
beyond the current gloom and see the bright side of Texas Instruments
once
again.
BARRON'S Online Weekday Trader is located at
interactive.wsj.com
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