A while back, while reading Anders Bylund's article on relative valuation, one thing really jumped out at me. In a table with financial ratios for several technology companies, Texas Instruments' (NYSE:TXN) price-to-earnings ratio, based on trailing 12-month earnings, was just 11. Yahoo! Finance confirms the number. Given Texas Instruments' dominant position in supplying chips for mobile phones, should we all go search between the couch cushions for spare change to load up on shares?

Well, maybe not.

It does look like a bargain at first glance, especially when compared with many other technology companies, as this table shows.



Microsoft (NASDAQ:MSFT)




Applied Materials (NASDAQ:AMAT)


STMicroelectronics (NYSE:STM)




If you take even a casual look at Texas Instruments' 10-K annual report for 2006, you'll see what's going on. A big chunk of its earnings last year was generated by the sale of its sensors and controls business. Texas Instruments let go of this business during the second quarter, receiving $3 billion in cash. Most of the sale price counted toward earnings for the second quarter, which boosted EPS by $1.09. Texas Instruments is in business primarily to sell semiconductor chips -- not to sell off parts of itself. Therefore, we should subtract this amount from its full-year earnings to determine its "real" P/E ratio.

Subtracting $1.09 from the $2.78 per diluted share shows that the company generated $1.69 per diluted share from its continuing operations. With Texas Instruments' current share price around $31, its trailing 12-month P/E from continuing operations is a bit more than 18 -- certainly not astronomical, but significantly higher than the number that the quote services provide.

While the quote services are great for getting a quick read on a company, you definitely don't get enough information to make a buy or sell decision. You still need to do some digging to understand the assumptions underlying the numbers -- otherwise you risk finding out later that your "bargain" stock wasn't such a bargain after all.

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Fool contributor Dan Bloom owns shares in Intel and would like to receive your comments. The Fool has a disclosure policy.