Tuesday, December 12, 2006

Color on news: Texas Instruments (NYSE:TXN)

Several firms are commenting on Texas Instruments (NYSE:TXN) after the co provided an expectedly weak mid-quarter update. The company lowered its 4Q06 revenue guidance from a range of $3.46 billion to $3.75 billion (flat to down 8% QoQ) to a range of $3.35 billion to $3.50 billion (down 7%-11% QoQ) and lowered EPS guidance from $0.40-$0.46 to $0.37-$0.40:

- JP Morgan is upgrading their rating to Overweight from Neutral saying this is the blow-up they have been waiting for. TI stated it is experiencing an inventory correction in analog semiconductors (38% of TI's 3Q06 sales) and poor demand for its DSPs (36% of TI's 3Q06 sales). The company's book to bill should remain below 1.0 for the second consecutive quarter.

Firm believes TI's gross margins are bottoming in 1Q07. They expect TI's gross margins to decline 340 basis points from the peak of 51.4% in 3Q06 to 48.0% in 1Q07, roughly in line with the previous downturn in 2004 when TI's gross margins declined 380 basis points.

JPM notes their stance on TI and many other semiconductor companies is to upgrade when they believe margins are close to bottoming and downgrade when they believe margins are close to peaking. Since they downgraded TI, they have been expecting an inventory correction to result in a "blow-up" and they stated they would upgrade the stock when they believed margins were close to bottoming. Firm believes last night was the "blow-up" they were looking for and margins should bottom during 1Q07. Valuation is also within 10% of the trough at 3.3X JPM's newly-lowered 2007 sales estimate.

- Merrill Lynch thinks TXN stock will likely to trade flat as inventory flushes through. TXN put the brakes on production as early as late Q3, and while the firm expects utilization to decline in the Dec-06Q, they do not believe internal inventory will come down until the Mar-07Q. Distributor inventory, however, will likely come down some in the Dec-06Q, but they think it will take another one to two quarters of under-shipping end demand before the supply channel is at an appropriate level.

Management indicated that the downward revision was also a result of a broad-based weakness across the product spectrum. This is consistent with their recent downward revision of estimates for TXN's analog business. ML's model now captures a 7% QoQ decline in the analog business in the Dec-06Q, followed by another 5% to 6% decline in the Mar-07Q.

At 17.9x´firmäs revised 2007 earnings estimate, they think the stock is reasonably valued. TXN was flat in after-hour trading despite the weak outlook, which suggests conservative expectations are already baked into the valuation. They expect the stock to trade sideways for the intermediate term, and rating stands at neutral.

- Morgan Stanley notes that given the magnitude of the company's downward revision, they are fine-tuning their forward estimates. Moreover, they believe a meaningful reduction to consensus estimates will have to occur, especially since they believe that most analysts have underestimated the ongoing weakness that should be seen in TI's first-quarter revenue, margin, and earnings

Firm's 2007 revenue and EPS estimates have been fine-tuned lower to $14.115 billion and $1.75, respectively, from $14.58 billion and $1.80. Their model assumes that TI will grow its revenues by about 6% in 2006, followed by relatively flat revenues in 2007. This outlook suggests that near-term risk to fourth quarter and first-quarter revenue and EPS estimates should remain widespread throughout the overall semiconductor industry. As TI's revenue growth slows and management reduces its own inventories, they expect the company's margins and earnings to succumb to pressure, which should last at least through the first quarter of 2007. As an eventual positive, TI's distributor inventories are expected to decline in the fourth quarter to an historically low level of 7-8 weeks.

Maintains Equal Weight anbd $34 tgt saying the stock looks to be fairly valued.

Notablecalls: Love this call by JPM. It looks so elegant. One the other hand they have been Neutral on the stock since Mar-05, missing the 10 pt upside the stock experienced meanwhile. Think JPM's call can be considered as a solid trading call. Ultimately, the fundamentals will prove'em wrong.

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