Thursday, August 26, 1999

Texas Instruments Inc.
Phone: 800-336-5236
Website: www.ti.com
Price (8/25/99): $81 1/2


As the old saying goes, a rising tide raises all ships. With the semiconductor market as a whole swinging back to the healthy end of its cycle, one of the ships that has been raised is that of Texan technology stalwart Texas Instruments. Forget about the gains other chip industry bellwethers Intel (Nasdaq: INTC), Motorola (NYSE: MOT), and Applied Materials (Nasdaq: AMAT) have posted. Texas Instruments has recently outperformed all those stocks.

Texas Instruments has benefited from the recovery in the commodity memory market through its investment in Micron Technology (NYSE: MU) as well as from the continued growth of its core Digital Signal Processor (DSP) chip operations. The demand for devices that use DSPs has been skyrocketing, and the DSP market is one that Texas Instruments currently dominates. Combine these factors and it is little wonder that Texas Instruments has been posting record profits. The company has now reported six straight quarters of incremental earnings-per-share increases, and the most recent quarter saw the firm earn $323 million in profits.

With the company clipping along and showing vibrant profit growth, the stock has had a banner year. Texas Instruments had been trading below $23 per share during last autumn's panic before its operational recovery became apparent. Since those dark days last fall, the stock has essentially been heading in the same northward direction, more than tripling and increasing the company's market capitalization some $40+ billion over the past year. Longtime shareholders are smiling wide as the stock has recently been making new all-time highs, perhaps making some think DSP stands for "Doubling Stock Price."


Headquartered in Dallas, Texas Instruments is one of the world's largest semiconductor companies. The firm is the world's leading designer and supplier of digital signal processing and analog semiconductors, chips that are used in a wide variety of applications including cell phones, computer modems, and hard disk drives. In essence, these chips convert analog signals, such as sound, into digital form. Texas Instruments dominates the rapidly growing DSP market with roughly a 45% share, more than twice the market share of its next largest competitor, Lucent Technologies (NYSE: LU).

Texas Instruments also has other lines of business that include materials and controls, educational and productivity solutions, and digital imaging. These other operations are small compared to the company's semiconductor business. The firm's chip business made up approximately 80% of the top line in the most recent quarter.

In 1998 the company sold its memory chip operations to Micron Technology to concentrate on its DSP-related semiconductors. The year before, the company also sold its defense electronics business to Raytheon (NYSE: RTN.A), its notebook computer business to Acer, and its software business to Sterling Software (NYSE: SSW). The focusing effort has also seen Texas Instruments buy several firms to complement its technology offerings, including Amanti Communications, Butterfly VLSI, Telogy Networks, ATL Research, GO DSP, Spectron Microsystems, Oasix, Libit Signal Processing, Arisix, and Integrated Sensor Solutions. Texas Instruments' most recent purchase offer, announced on July 26, was for Unitrode Corp. (NYSE: UTR).

Texas Instruments is a member of the S&P 500 index.


Income Statement

12-month sales: $8,492 million
12-month income: $911 million*
12-month EPS: $1.13*
Profit Margin: 10.7%
Market Cap: $66,194 million
(*Includes non-recurring items)

Balance Sheet
Cash and Investments: $1,743 million
Current Assets: $4,821 million
Total Assets: $11,047 million
Current Liabilities: $2,078 million
Long-term Debt: $960 million
Total Liabilities: $4,326 million

Price-to-earnings: 72.1
Price-to-sales: 7.8


Texas Instruments has been singing the praises of DSP for many moons, and has put its wallet where its mouth is. Between ridding itself of numerous non-core lines of business, while acquiring other DSP-related firms left and right, Texas Instruments is clearly serious about dominating the DSP market. By focusing on a market with such a bright future, Texas Instruments was positioning itself extremely well. The company revealed its intentions a long time before the market started believing in the firm's "vision."

One sign of operational strength is the fact that the company has (after adjusting for one-time charges and benefits) bested its earnings estimates for the past four quarters in a row. It's almost always good to see a company top what was expected of them.

Looking at the company's margins was another way to have tuned into the fact that Texas Instruments was hitting on all cylinders. Not only have the per-share earnings been increasing incrementally, but the gross, operating, and net margins have been expanding over time. Whether through cost-cutting measures or pricing strength, increasing margins are generally a bullish sign.

Texas Instruments' Margins:

Q2 1998 Q3 1998 Q4 1998 Q1 1999 Q2 1999
Gross 32.8% 38.1% 44.2% 44.7% 49.0%
Operating -6.8% 9.6% 13.6% 13.9% 19.4%
Net 2.0% 7.8% 9.5% 11.4% 13.8%
EPS $0.06 $0.21 $0.24 $0.29 $0.40


While Texas Instruments has no direct operations in the commodity memory chip business, it still holds significant equity and debt investments in Micron Technology. Texas Instruments may have less exposure to the memory market than in years past, but it will still feel both positive and negative effects from this notoriously cyclical market.

While the DSP market tends to be less cyclical than the memory market, just about any semiconductor market is going to be inherently volatile. Few doubt that total usage of DSPs will continue to skyrocket as devices such as cell phones continue to grow in number and new technologies such as portable digital music players and wireless modems become more mainstream. However, the jury is still out concerning whether it will be generally straight-line or cyclical growth. It will be important for shareholders to keep an eye on the company's market share and selling prices in order to gauge where Texas Instruments is positioned against its numerous competitors. After all, new technologies can flip leaders in a hurry, and competitors may cause erosion in prices.

This isn't to say that Texas Instruments has a flimsy hold on its dominant position. In fact, one might say that it has a stranglehold on the DSP market. Between being in the DSP market since essentially its inception and its laser focus on this attractive subset of the semiconductor industry as highlighted by its numerous corporate purchases, Texas Instruments will be difficult to topple as the current king of the hill.

One cannot rule out more asset divestitures from Texas Instruments, though none have been announced lately. It is also fairly certain that Texas Instruments will continue to be relatively active in buying other firms that complement the company's core DSP technology offerings. In short, it appears that the company will continue with whatever corporate strategies are needed to keep atop the DSP market.

On the valuation front, it looks as if much of the optimism about the DSP market as a whole and Texas Instruments in particular has already been priced into the stock. The company is expected to earn $2.10 per share in fiscal 2000, which puts the stock price at over 38x forward earnings. Even if the stock is not cheap at the moment, Texas Instruments is still worth keeping on the radar for the next time Wall Street throws one of the country's premier semiconductor firms in the discount bin.

--Paul Larson

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