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Technology Stocks : Texas Instruments - Good buy now or should we wait? -- Ignore unavailable to you. Want to Upgrade?

To: John Chen who wrote (4113)	10/21/1998 12:12:00 PM
From: Just_Observing	Read Replies (1) \| Respond to of 6180

Here it is - Tom Kurlak on TI Orders, Sales Remain Weak Third quarter results showed better than expected earnings of $0.41 a share, down from $0.60 last year and above our $0.25 estimate due to a lower memory loss. Sales declined by 15%. The quarter included a one time royalty payment of about $0.05. Looking at the business from an ongoing operations basis, disregarding the divested memory business, is more instructive. Sales fell 8% year to year and pretax income was flat. (Financial statements we obtained today were printed incorrectly leading to an incomplete picture of results.) The largest segment of TXN's ongoing business is DSPS (Digital Signal Processor Solutions) which is DSP chips plus analog. This segment represents 58% of semiconductor sales and, at nearly $900 million a quarter, is 46% of total sales. Despite all the optimism on Wall Street for this sector due to the growth of wireless communications applications, DSPS sales in Q3 were flat year over year while orders declined by 14%. The flat sales level is the result of DSP chips themselves being up 17% while the larger analog line (TXN's largest) fell 11%. We see no momentum going into Q4 for DSPS and given that the total semiconductor booked to billed was under 1.0 and backlog declined in Q3, sales could decline for TXN sequentially in Q4. The DSPS sales weakness is due to continuing across the board softness in hard disk drives and modems, which together about equal the growing wireless cell phone market. DSP chip sales alone have been level for the past three quarters now, causing year to year DSP growth to decelerate from 35-40% a year ago to 17% in Q3. Total TXN orders, before DRAMs, fell 12% from last year. Management remains cautious and projects a level sales result in Q4 with Q3 at this time. Due to lower expenses as a result of the DRAM divestiture, Q4 earnings should lift to around $0.47 a share. From that level we continue to build a $2.00 earnings model for 1999 which assumes no growth in the worldwide semiconductor industry. We continue to view TXN's stock price as overvalued relative to its projected earnings level. This view is reinforced by the fact that royalties, at an estimated $145 million in Q3, represented over 70% of reported operating income of $203 million and even in Q4, without DRAM losses and $30 million of one time royalties included in Q3, still represent 40% of projected operating income of $253 million. If royalties are excluded, the reported operating margin of 9.6% in Q3 declines to only 3%. In Q4, without royalties or DRAM loses, the margin improves to only 8%. These are not attractive profitability levels when compared to other semiconductor companies who have little or no royalty income. Accordingly, given this observation together with weak sales and orders for DSPS, we cannot justify TXN's current price earnings multiple of 32. Good Luck