This is the complete write up from the DLJ recomendation..
Note the last line..
Subj: fwd: DLJ report on TXN - 5/11/98
NOTE: DLJ has changed analysts covering TI and Charles Boucher has
raised TXN from a HOLD to a BUY with a target price of $90.
TEXAS INSTRUMENTS: Assuming Coverge of Texas Instruments with a Buy
05:05pm EDT 11-May-98 DLJ Securities (Charles Boucher) TXN TXN/
Range: Earnings Per Share 1998 vs 1997 % Chg
71.25-39.63 Old New P/E Ratios MAR $0.44 vs 0.35 +26%
(FY:Dec.) 1999E $ $3.25 20.1 JUN E 0.45 vs 0.54 -17%
1998E 2.15 30.4 SEP E 0.56 vs 0.60 -7%
1997A 2.04 32.1 DEC E 0.70 vs 0.55 +27%
Yield: 0.5% Market Cap.: $26.18 billion 5-Yr. Growth Rate: 22%
Dividend: $0.34 Avg. Trading Vol.(000): 3,756 Book Value: $14.94
RATING: Buy Change: None 12-Mo. Target: $90.00
Texas Instruments is a leading supplier of semiconductor products and
educational and productivity solutions. The company derives nearly all of
its revenue from semiconductor products, which comprised 84% of revenue in
the March quarter. TI's semiconductor division is a combination of
proprietary logic products such as DSPs, ASICs, analog/mixed-signal
devices, and specialized logic products; and memory products, consisting
primarily of DRAMs. TI generated total revenue of $9.75 billion in 1997,
and operating EPS of $2.04, excluding several non-recurring charges and
credits taken for acquisitions, sales of business units, and various
restructuring charges. The company is headquartered in Dallas, Texas, and
employs approximately 44,100 people worldwide.
Rapid Transformation
--------------------
TI has undergone a very fast transformation in the past year, selling off
several non-core operations, including defense products, notebook PCs,
contract manufacturing, printers, and several software divisions. The
company's revenue mix has become increasingly centered on its semiconductor
operation as it has shed other divisions, with semiconductors accounting
for 84% of revenue in the most recent quarter.
The company has also made several acquisitions, including Silicon Systems,
a mass storage semiconductor specialist, and Amati Communications, a
pioneer in the development of ADSL communications technology. The net
result of the sales and acquisitions is that TI has emerged as a nearly
pure play proprietary semiconductor company with a strong emphasis on DSP
technology and the communications end markets.
DSP Technology Focus
--------------------
The core of TI's semiconductor product thrust is its DSP technology. TI is
the market share leader in DSPs, with a commanding 45% share. DSPs are high
performance processors that specialize in crunching digital data in real
time to support applications that require the digital data be processed
immediately so that the results can be used immediately, for instance the
processing of a digital audio signal that will be immediately listened to,
or processing a digital cell phone signal, which will be heard immediately
as part of an ongoing conversation.
DSPs are finding applications in many areas as their cost comes down,
including digital cellular phones, digital consumer electronics (i.e., DVD
players), mass storage devices, communications and networking systems,
automotive applications and more. The DSP market is forecast to grow at
nearly a 30% compound annual growth rate over the next several years.
We believe that TI will continue to dominate the DSP market for the
foreseeable future. The company has invested in DSP applications software,
real-time DSP operating systems, development tools, and applications
support that will help differentiate its product offerings. TI has also
developed auxiliary silicon products that wrap around the DSP to form a
complete component solution, such as analog and mixed-signal products.
Although DSP chips comprised an estimated 21% of semiconductor revenue in
the March quarter, DSP system solutions, which rolls up the total TI
component revenue from a DSP solution, including the analog /mixed signal
and ASIC content, comprised nearly 50% of total semiconductor revenue. We
believe the ability to bundle complete solutions gives TI a competitive
edge in the DSP market.
Reduced Memory Dependence
-------------------------
TI's DRAM dependence has declined to just 12% of semiconductor revenue as
of the March quarter. We expect it to continue to decline going forward, as
TI invests its development dollars in proprietary product areas. It would
not be surprising if the company were to sell its DRAM operations to
another memory company or to its joint venture partners in the case of the
JV operations.
Most of TI's DRAM production occurs through its JV arrangements, including
TI-Acer in Taiwan, KTI in Japan, and TECH Semiconductor in Singapore. TI
recently announced that its stake in TI-Acer was sold to Acer, which will
ultimately end TI's obligation to the JV. The benefit of the JV structure
is that in principle, the JV provides less abrupt swings in profit margin
as memory prices fluctuate; of course in periods of extreme price changes,
the protection is limited. However, we believe that once memory prices
stabilize, the operating loss that TI has experienced from its memory
operation could collapse quickly. We expect to see DRAM prices stabilize
during the second half of the year, which could aid TI's revenue and
earnings performance.
Outlook
-------
Like many other companies, TI had a difficult time in the March quarter as
the industry grappled with slowing demand and inventory pileups. The
company's major markets, hard disk drives, fax/modem and digital cell
phones all underwent major corrections, resulting in lower bookings,
revenue and earnings for TI. The weakness is expected to stabilize in the
June quarter, with revenue and earnings about flat. We are encouraged about
the outlook beyond the June quarter. Digital cell phone sales are still
healthy, and component inventories at cell phone OEMs appear to nearing
target levels. The new V.90 fax/modem standard has rejuvenated sales, and
we believe TI's fax/modem business should start to recover in the September
quarter. Indications from the disk drive sector are that inventories are
dropping, and business is expected to turn up in the second half of the
year. We believe that TI's competitive position in each of these markets
remains very strong, and the company should generate renewed growth in the
third and fourth quarters.
As TI's revenue growth resumes, we think that significant leverage exists
in TI's operating model. The company continues to shift its revenue mix
toward proprietary logic products, which carry higher margins than
commodity memory. Also, as DRAM prices stabilize, we expect a substantial
net positive incremental effect on gross margin due to the joint venture
manufacturing structure. We project operating margin to improve into the
mid-teens range for 1999.
Valuation and Investment Recommendation
---------------------------------------
TI stock currently trades at 20 times our CY99 EPS estimate, and 2.6 times
LTM revenue. The stock is not inexpensive. However, with earnings expected
to grow by 50% in 1999, and the stock trading at a discount to the S&P 500
based on the 1999 P/E multiple, we believe the stock has meaningful upside
potential, particularly as the company's return to revenue and earnings
growth becomes more visible. We further believe that the company's focus on
communications and data networking solutions could result in multiple
expansion from current levels. A 28 P/E multiple for 1999 earnings
represents only about a 15% premium to the S&P 500, and is conservative
compared to the multiples assigned to pure play communications component
companies. We are assuming coverage with a Buy rating, and setting a 12-
month target price of $90. |
