Tuesday, April 24, 2007

Texas Instruments (NYSE:TXN): Sell that gap?

Several firms are commenting on Texas Instruments (NYSE:TXN) after the co issued better than expected Q1 results and provided blow-out Q2 guidance. We have at least one firm upgrading the stock this AM. Despite all the positive chatter, some of the largest firms remain cautious on the name:

- Morgan Stanley notes that Wwhile TI's very strong gross margin performance will likely drive EPS estimates as well as the stock price higher in the short-term, they expect a lackluster consumption environment to put a damper on additional upside in the stock, and they maintain their Equal-weight rating on TXN.

While the passing of the supply side cyclical correction in the semiconductor industry is a positive, they believe the supply side recovery is occurring in the midst of a deceleration in global GDP leading to an overall lackluster demand environment. While semiconductor bookings improved 2.2% Q/Q bookings were also down 10% Y/Y, and near-term visibility is limited (as evidenced by a semiconductor book-to-bill ratio of 0.99). Inventory dollars declined Q/Q but inventory days reached new 17+ year highs.

Based off MSCO's 2007 and 2008 earnings estimate of $1.86 and $2.15, respectively, TXN currently trades at a price-to-earnings (P/E) ratio of 17.4x and 15.1x. With 5-year growth estimate for the company at 15%, they believe a PEG ration of one times is appropriate, and the stock is reasonably valued.

- Goldman Sachs is telling investors not to chase the stock this morning. TI's fundamentals are clearly better than expected and the firm is adjusting EPS to reflect improved outlook; 2007 to $1.68 from $1.45, 2008 to $1.90 from $1.80, and 2009 to $2.05 from $1.95. That said they recognize they have been wrong to be overly negative on the stock, however, valuation is rich already as the stock trades after market at 21x their revised 2007 EPS and 20x normalized.

Hence, for large cap investors looking for semi exposure, they continue to believe Intel is more interesting as there is significantly greater upside as Intel appears to be improving its long-term competitive position vs AMD while TI's long-term position in wireless is challenged by a host of high-quality baseband and application processor competitors. In addition, TI's margins are at their peak, while Intel has room to improve.

Notablecalls: Must say that I've never seen TXN make such a move. The stock ended up 10% in after hours action. I think most of the upside was driven by short covering as many market participants were expecting lackluster results and guidance on heels of disappointing news from the wireless sector. What they underestimated, was TXN's ability to manage gross margin, thanks to its fab-lite model. The co surely tipped their hand with the big dividend raise they announced last week. Now, the problem with the fab-lite business model is that while it helps to preserve margins during downturns, it caps margin upside during better times. So, one can assume TXN's margins are close to their peak.

I don't think end demand has turned a corner. In fact, I think it will get worse from here. TXN's boosting their inventory in anticipation of a new cycle that will likely not materialize. That's a bad combo.

As for the s-t, I love the fact we have an upgrade from Piper Jaffray. The call won't hold much weight among the buy side players but it may get the stock closer to the $36 level early on. It's there where I'd be looking to short TXN. Note that all time high stands at $36.40 but I'm somewhat doubtful it will get there. So, I think that if you can get a fill between $36 and $36.40, you'll likely make money shorting.

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