Why Texas Instruments Incorporated Shares Will Rally 25%

While Fools should generally take the opinion of Wall Street with a grain of salt, it's not a bad idea to take a closer look at particularly stock-shaking upgrades and downgrades -- just in case their reasoning behind the call makes sense.

What: Shares of Texas Instruments  (NASDAQ: TXN  ) gained about 1% today after RBC Capital upgraded the semiconductor giant from sector perform to outperform.

So what: Along with the upgrade, analyst Doug Freedman raised his price target to $57 (from $49), representing about 27% worth of upside to yesterday's close. So while contrarian traders might be turned off by Texas Instruments' price strength over the past year, Freedman's call could reflect a sense on Wall Street that its growth prospects still aren't fully baked into the valuation.

Now what: According to RBC, Texas Instrument's risk/reward trade-off is rather attractive at this point. "The company has been laser focused on its capital management strategy, and we believe TXN delivers FCFs at the upper-end of its 20-30% of revenues range (RBCe: CY15/29%, CY16/28%)," said Freedman. "We suspect TXN is benefiting more from unit growth and mix shift vs. pricing power, which is driving revenue/GM upside as utilizations remain low (high-70% range)." Of course, when you couple Texas Instruments' hot stock price with its still-intense competitive environment, I'd hold out for a wider margin of safety before betting on that bullishness. 

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