Chipmaker Texas Instruments (NASDAQ: TXN ) had an indifferent 2012 due to sluggish economic conditions. However, driven by an improvement in chip demand, the company has been on a good run this year. Shares are up close to 33% and its robust performance looks set to continue on the back of improving orders.
In the second quarter reported in July, Texas Instruments' management stated that the company's book-to-bill ratio was 1.03. This means that Texas Instruments received more orders that it could have fulfilled. The important thing to note is that the company witnessed an identical book-to-bill ratio in the preceding quarter, which indicates that it is seeing consistent order patterns.
Two important catalysts
An uptick in the automotive and industrial markets has led to greater demand for Texas Instruments' chips. With these two end markets combining for 35% of the company's overall revenue, it isn't difficult to see why Texas Instruments is upbeat about its prospects.
Vehicle sales in the U.S. have picked up nicely this year, even though September turned out to be a slow month due to a lower number of selling days. The annual auto sales rate was still a commendable 15.28 million vehicles in September, which is higher than 2012's total vehicle sales of 14.5 million.
Moreover, as reported by Reuters, analysts expect the auto industry to withstand the effects of the federal government shutdown. This is good news for automakers and for chipmakers such as Texas Instruments that supply car infotainment processors, connectivity solutions, driver assist systems, etc.
The industrial market has also seen steady growth this year and aided Texas Instruments in the process. Even though industrial activity witnessed earlier in the year has slowed down of late, the Manufacturers Alliance for Productivity and Innovation (MAPI) expects growth to accelerate. MAPI estimates that manufacturing production will improve 2.2% in 2013, and subsequently improve by one percentage point each in 2014 and 2015.
Growth in industrial activity has proven beneficial for players across the semiconductor industry. For instance, chipmaker Avago Technologies (NASDAQ: AVGO ) witnessed sequential growth of 18% in its industrial segment in the previous quarter along with improved order rates. China and Japan led the uptick in industrial sales for the company. Avago management also stated that it saw inventory replenishments after a couple of quarters of de-stocking by customers, which bodes well for Texas Instruments as well.
Strength in automotive and industrial has led to strong growth in Texas Instruments' analog business and market share gains. The company seems more sure-footed now as it recently narrowed its guidance range for the third-quarter, but kept the mid-point of its revenue and earnings expectations intact. In addition, Texas Instruments' gradual exit from the low-margin wireless business and its focus on analog and embedded processing solutions should lead to margin growth in the future.
Moreover, Texas Instruments isn't trading at expensive levels even after appreciating more than 30% this year. Its trailing P/E of 22 is almost identical to another diversified semiconductor company -- Analog Devices (NASDAQ: ADI ) -- that's facing tough times of late and has underperformed so far this year.
Analog Devices has issued a string of weak outlook figures in the past few quarters, and yet it trades at a similar level to both Texas Instruments and the industry average. Analog Devices also enjoys similar catalysts as Texas Instruments -- growth in automotive and industrial end markets -- but it also stands to gain from the deployment of 4G LTE in North America and China. This is probably the reason why analysts expect its earnings to grow an impressive 20% next year.
Texas Instruments' earnings are expected to grow 15% next year, which is lower than Analog Devices. But it should be noted that Texas Instruments' Price/Cash Flow ratio is lower at 13.7 than Analog's 16.9. This means that investors would be paying less for every $1 of cash flow if they invest in Texas Instruments rather than Analog Devices.
Texas Instruments has raised its dividend for 10 years now, including 43% this year itself. The company returns all of its free cash flow to shareholders excluding the amount it needs to repay debt. Hence, with a solid capital management strategy in place, along with a decent dividend yield of 2.90% and expected growth in the industrial and automotive end markets, Texas Instruments looks like a good bet even at its 52-week highs.
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