Thursday, April 14, 2011

Texas Instruments Inc. (NYSE: TXN): Q1 Earnings Preview 2011

Texas Instruments Inc. (NYSE: TXN), the world's second largest maker of mobile phone chips, is scheduled to release its first-quarter earnings after the closing bell on Monday, April 18, 2011. Analysts, on average, expect the company to report earnings of 58 cents per share on revenue of $3.40 billion. In the year ago quarter, the company reported earnings of 52 cents per share on revenue of $3.20 billion.

Texas Instruments Incorporated engages in the design and sale of semiconductors to electronics designers and manufacturers worldwide. The company operates in four segments: Analog, Embedded Processing, Wireless and Other. The company has successfully realigned its business to reduce focus on the commoditized, low-margin market for wireless chips. Texas Instruments expects Analog and Embedded Processing to be its primary growth engines in the years ahead.

Texas Instruments makes chips for both low-end and high-end mobile phones. The low-end, used primarily in emerging markets like India and China, earns less margin, however, works out well due to the high volume involved. The high-end has higher profitability and is used in phones having better features, used primarily in the developed countries. The company also makes chips for digital cameras and televisions as well.

In the preceding third quarter, the Dallas, Texas-based company's net income was $942 million or $0.78 per share, compared to $655 million or $0.52 per share for the year-ago quarter. Revenue rose 17% to $3.53 billion from $3.01 billion in the same quarter last year. Analysts, on average, expected the company to report earnings of 63 cents per share on revenue of $3.50 billion.

Early in March, the company tightened its outlook for the first quarter of fiscal year 2011 in a scheduled update, while keeping the midpoints intact. TI said that it currently expects earnings in the range of $0.56 to $0.60 per share for the quarter. While reporting its fourth quarter results, the company indicated its earnings forecast in the range of $0.54 to $0.62 per share.Quarterly revenues are expected in the range of $3.34 billion to $3.48 billion, compared with the prior range of $3.27 billion to $3.55 billion.

The company is generally viewed as strong long-term player in the chip market, especially given its robust position in the analog and embedded processing markets. The company continued to invest during this recession, making smart acquisitions, expanding the sales force, and expanding manufacturing capability. 

The company is focusing on tried-and-true profitable tech segments that have long product lifecycles and reasonable economic moats, while also keeping itself as a key player in the growing smartphone market. Texas Instruments is prudently investing its R&D dollars into several high-margin, high-growth areas of the analog, embedded processing and wireless markets, which has led to solid order growth in the recent past. The phasing out of the low-margin baseband business also remains on track and should generate some margin expansion every quarter. This, along with a stronger mix and cost control is resulting in great earnings momentum and solid cash flow.  Texas Instruments' compelling product line, the increased differentiation in its business, lower-cost 300mm capacity and possibly aggressive pricing strategy (in the next few quarters) should continue to drive earnings momentum.

Early this month, TI agreed to buy smaller rival National Semiconductor Corp. (NYSE: NSM) in an all-cash deal of about $6.5 billion,. Following the completion of the deal, National will be part of TI's analog segment, and sales of analog chips will constitute almost 50% of TI's total revenue. With a portfolio of 12,000 products and a strong position in industrial products and power management, National nicely augments TI’s offering of 30,000 analog products. TI held a 14% share, while National held a 3% share of the $42 billion market for analog chips last year. Analog products contributed 43% of TI's 2010 revenue, and would have accounted for half the combined company's sales last year.

Among other developments, one of the company's three fabrication plants in Japan suffered earthquake-related damage, which could crimp first-quarter earnings, due to be reported April 18. The plant accounted for 10% of last year's revenue, but management said it could move as much as 60% of production to other facilities.

The company's stock currently trades at a forward P/E (fye Dec 31, 2012) of 12.07 and PEG ratio of 1.30. In terms of stock performance, TI shares have gained nearly 32 percent since the beginning of the year.

Full Disclosure: None. 
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