Tuesday, September 12, 2006

Color on quarter: Texas Instruments (NYSE:TXN)

- Nothing too drastic was revealed in Texas Instruments' (NYSE:TXN) mid-quarter report. After going through the broker chatter this morning I think the note from JP Morgan sums it up best:

Firm notes TI provided an update on the first two months of its 3Q06. As they expected, the company maintained its previous 3Q06 revenue and EPS guidance and narrowed its revenue guidance from a range of $3.63 billion to $3.95 billion, (down 2% to up 7% QoQ) to $3.71 billion to $3.87 billion (flat to up 5% QoQ) and narrowed EPS guidance from a range of $0.42 to $0.48 to a range of $0.44 to $0.46.

TI stated its Analog (37% of 2Q06 revenue) and DLP (6% of 2Q06 revenue) products are exhibiting strength while its wireless business (32% of 2Q06 revenue) is experiencing below-seasonal order trends.

The company stated its book to bill is dropping, which the firm believes is a pre-cursor to an inventory correction since the last time TI's book to bill was below 1.0 was mid-2004, during the last inventory correction. They believe TI should begin to experience cancellations and push-outs before the end of year and result in estimate cuts, which is when they firm could revisit their rating and become more positive.

Notes National Semiconductor (NYSE:NSM), one of TI's largest competitors, lowered expectations last week partially due to an inventory build at distribution. Firm continues to believe the semiconductor industry has too much inventory as YoY unit growth (ex-discretes) was 22% in the recent SIA July sales data, roughly twice the normal YoY unit growth of 10%, clearly indicative of an inventory build.

They are maintaining their C06 and C07 revenue and EPS estimates.

TXN is trading at 17X C07 EPS estimate of $1.88, the lower half of its historical range of 10X-30X NTM EPS. Despite ranking of TI as one of the most attractive stocks for the long term, the firm believes fundamentals and margins for TI have peaked and order rates should decline during 2H06 leading to a reduction in sales and earnings estimates. As a result, they reiterate Neutral rating on the stock.

Notablecalls: The path of least resistance in TXN's case is surely down.

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