Texas Instruments: Analysts Target 47% Increase to $100
Toronto, ONT, July 13 /SHfn/ -- Salomon Smith Barney [SSB] analyst Jonathon
Joseph downgraded the semiconductor sector last week, arguing that it shows
signs of a reversal. As a result of Joseph's comments, the sector was beaten down
7-8% on July 5. However, evidence suggests Joseph's analysis is incomplete, and
that he fails to consider the salient dynamics taking place in the sector. The 23%
decline in Texas Instruments [TXN] from $88 in late June to Wednesday's closing
price of $68 is both overextended and unwarranted. Other analysts remain bullish
on the stock. Credit Suisse First Boston and Bear Stearns each have one-year
price targets of $100. Last week, a StockHouse report found technical support
suggesting that TI shares could reach $125.
Texas Instruments is the world's largest supplier of programmable Digital Signal Processor (DSP) components and analog
semiconductors. The company's largest vertical end-markets include wireless handsets, mass storage and digital modems.
Competition in the space is intensifying, as Analog Devices [ADI], National Semiconductor [NSM], Altera [ALTR] and Intel
[INTC] strive to secure additional market share.
Over the next six to nine months, Joseph forecasts a slowdown in the sector as reduced chip shipments, lower prices and
decreased growth in the cellular phone market put downward pressure on chip stocks. He postulates that inventory levels, rising
interest rates and slowing growth in the cellular component business mark a reversal in the semiconductor cycle. However, Joseph's
hypothesis is inconsistent with forecasts by other leading analysts. Evidence provided by Bear Stearns suggests chip demand will
outstrip supply. A recent report from Chase Hambrecht & Quist shows that bookings are strong and accelerating. It also notes
longer lead times and relative price stability materializing. According to Bear Stearns' Charles Boucher, "We are entering the sweet
pot of the semiconductor expansion cycle." He asserts that strong unit growth and margin expansion will drive the expansion.
Although Joseph predicts a slowdown in the sector, Texas Instruments' business should remain
robust as a result of seasonal strength and new design wins. Credit Suisse First Boston analyst
Charlie Glavin concludes that TI's wireless business is relatively strong, and is not susceptible to
recent unfavorable developments taking place in the weakening CDMA wireless product market. In
fact, TI's seasonal strength in DSP and analog businesses has partially offset lower revenues in its
hard drive business segment. In addition, the company is making headway with new design wins at
Ericsson [ERICY] and Siemens [SMAWY], and a strong customer relationship led to a bundle
design win at Compaq [CPQ]. TI's analog/ADSL product will be used in Compaq's DSL-ready PCs,
which were recently selected by SBC [SBG] and Prodigy [PRGY] for their "Free PC" promotions.
More than 50,000 DSP programmers use TI's developer tools. The company is exploiting this large base to promote analog products
in a cross-selling initiative known as "Analog Attach." Also, a recent acquisition allows TI to extend its analog product line, and sell
to the third-generation wireless, DSL, digital audio and video markets. These forces should increase the firm's operating margins to
as high as 25%, according to Credit Suisse's Glavin.
TI's acquisition of Burr-Brown [BBRC] for $7.7 billion in stock is a strategic fit. From a competitive
standpoint, the acquisition indicates that TI intends to strengthen its position in the analog market,
putting pressure on Analog Devices. The purchase adds complementary expertise in high
performance data converters and amplifiers, and catapults TI to the second and third market
positions, respectively. In addition, Burr-Brown has analog design talent that is in short supply, and
favorable market positions in high-growth end-markets like DVD, xDSL and fiber-optics. The deal also
gives TI a boost in the slow-to-develop high performance analog business, where it can leverage its
48% DSP market share and its manufacturing prowess.
Price stability also bodes well for companies like TI. A recent Bear Stearns report titled "Semiconductors: Cycle Heading into
Overdrive, Stocks Poised to Outperform--Buy Now," provides persuasive evidence of a slowing of price declines in microprocessors,
DSPs, programmable logic devices, and high performance analog components.
Given that Texas Instruments is a barometer for the semiconductor sector, industry comparison can provide an important valuation
perspective. The semiconductor sector looks relatively attractive on a forward P/E basis. For example, broadband and wireless
communication stocks currently trade at an average of 85x calendar 2001 EPS, equivalent to a 280% premium to the S&P 500. In
comparison, semiconductor stocks trade at close to 32x calendar 2001 EPS, equivalent to a 40% premium to the S&P 500.
Joseph's industry downgrade late last week was, on balance, without merit. The combination of the strategic synergies of the
Burr-Brown acquisition, the growth in Texas Instruments' DSP market share, and higher penetration rates with its digital and analog
products suggest that TI is an enviable candidate for purchase.
On June 22, analysts Eric Ross of Thomas Weisel, and Hans C. Mosesmann of Prudential Securities, raised their Texas
Instruments price targets to $120 and $125, respectively. |
