Foolish Forecast: Don't Mess With Texas Instruments

Wherever there's a gadget of any kind, you'll likely see a chip or two from Texas Instruments (NYSE: TXN). The company reports third-quarter earnings tonight, so let's see how TI has behaved in the past few months.

What Fools say:
Here's how TI's CAPS scoring rates against some of its peers and competitors:

	Market Cap (billions)	CAPS Rating	Bull Ratio
Texas Instruments	$48.6	****	92%
STMicroelectronics (NYSE: STM)	$14.2	**	80%
Analog Devices (NYSE: ADI)	$10.7	****	90%
Linear Technology (Nasdaq: LLTC)	$7.4	****	94%
National Semiconductor (NYSE: NSM)	$6.9	***	85%

Data taken from Motley Fool CAPS on Oct. 22.

The bull case is easily stated: "As the global demand for electronics rises, so should Texas Instruments," says one all-star CAPS player. "Its strong management team and proven record of market beating returns add to this argument." Other Fools weigh in with thumbs-up comments on great management and dominant market position.

The bears have been few and far between lately. The only negative commenter in the last six months complains that TI doesn't develop software for its own chips, which makes customers' engineers like himself miserable.

What management says:

• Revenues. In its latest mid-quarter business update, TI told us to expect sales between $3.56 billion and $3.72 billion. That trimmed a few million dollars off the top and bottom ends of prior guidance, and compares to $3.76 billion in year-ago sales.
• Earnings. The earnings guidance range was nudged up a little bit, and now rests between $0.49 and $0.53 per share. Last year, the company earned $0.45 per share from continuing operations.

What management does:
Revenue growth peaked last fall, when the cell phone industry got stuck in a nearly year-long quagmire of slow growth and unattractive product mix. When major customers like Nokia (NYSE: NOK) and Motorola (NYSE: MOT) hit a rough patch, so does TI.

You can see TI's response to that slip in these numbers. The asset-light manufacturing strategy served to boost gross margins and reduce capital expenses, which in turn increased free cash flows.

Margins	3/2006	6/2006	9/2006	12/2006	3/2007	6/2007
Gross	49.7%	50.6%	49.6%	50.9%	51.3%	51.5%
Operating	21.9%	23.3%	23.8%	23.6%	23.7%	23.2%
Net	19.3%	31.1%	28.5%	30.5%	30.3%	18.0%
FCF/Revenue	18.3%	15.1%	7.2%	8.3%	10.0%	13.5%

Y-O-Y Growth	3/2006	6/2006	9/2006	12/2006	3/2007	6/2007
Revenue	5.0%	13.4%	24.7%	15.6%	8.8%	1.1%
Earnings from continuing operations	25.7%	24.5%	34.3%	21.4%	11.4%	-0.6%

Data courtesy of Capital IQ, a division of Standard & Poor's. Data reflects trailing-12-month performance for the quarters ended in the named months.

One Fool says:
The cell phone market drank its chicken soup and is starting to look healthy once again. TI's digital light processing technology for high-def television and projection screens is hitting its stride, and the company is jockeying for an early lead in the fledgling WiMax communications market.

There's plenty to like about the digital Dallas dominator these days. The asset-light strategy has been successful enough to attract other chip makers, and it leaves TI with the flexibility to respond to unexpected market swings in ways that in-house factories can't.

An 18% profit margin is uncommon in the hardware business; a PEG ratio around 1.0 is cheap for the industry; and these guys even pay a modest dividend. Sooner or later the market should catch on to what a great deal TI is. Tonight's earnings report might kick things off. It's all in the forward-looking statements, folks.

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