I told you to watch the Texas Instruments (NYSE: TXN) report in order to either confirm or debunk the positive semiconductor trends that Intel (Nasdaq: INTC) signaled last week. The pride of Dallas got up in its soapbox with megaphone and semaphores, and the message is clear: Chips are safe for investors again.
Indeed, I can feel a CAPScall coming on. Stay tuned for the exciting conclusion.
The wheel in the Valley keeps on turning
TI's fourth quarter delivered surprisingly strong sales, and I mean surprising even to the company's own management. "Revenue in the fourth quarter was higher than expected across all our major product lines," said CEO Rich Templeton. With or without recovery in the larger economy, Templeton calls a bottom to the semiconductor cycle here.
The semiconductor industry is in a constant ebb and flow of chip inventories. Customers build up huge stockpiles when chips are cheap, or shortages might be on the horizon, or another holiday period demands enormous production volumes. Chip makers build factories just to keep up with high demand, and times are good all around the sector.
Then the tide turns. End users stop craving new gadgets for whatever reason, like the personal budget crunches we've seen in recent years. Those sparkling new factories run at half speed. Gadget and system builders start chewing through those warehouses full of unused processors. Intel and TI don't like this part of the cycle, because clients don't order a whole lot of freshly made chips when there's plenty in store already.
The industry sees this pattern repeating every so often, and there are telltale signs when things start looking up again. In this case, TI suddenly saw an uptick in fresh orders and distributors wanted to fill their pipelines. So the order backlog is still thin and real visibility remains limited, because the bounce just started and these metrics take a while to firm up. Yet management expects sales to buck seasonal trends and stay relatively strong in the first quarter.
"The market continues to show promising signs that the bottom has formed and that demand could begin to improve soon," says CFO Kevin March. "When it does, we intend to be well positioned with capacity and inventory."
That's what I want to hear. TI's management exudes equal measures of optimism, confidence, and plain old common sense.
Investors win when the wheel turns
And then the whole cycle starts again. When TI bounced back from the last mini-cycle in late 2010 and early 2011, share prices soared nearly 50% in less than six months. Close rivals Analog Devices (NYSE: ADI) and QUALCOMM (Nasdaq: QCOM) followed very similar patterns, and all three stocks absolutely crushed the broader market in that period. If it were to take place again, it could bode extremely well for all parties involved.
They also left Intel eating their dust. The semiconductor sector is a fair bit more complicated and segmented than many investors might think. The rising tide doesn't always lift all boats. But when you see confirmation from both the computing side (Intel) and TI's industrial and mobile computing markets, you know you've got something special going on.
Terrible advice you should ignore
Several analyst firms scanned these results and concluded that TI should be in the hold category today. The stock has climbed too far, too fast to get buy recommendations from the Street pros. I think they're being shortsighted.
It's true that TI shares have come a long way since bottoming out last September, but then again, so has the stock market overall. The Dow Jones Industrial Average gained 18% over the last four months while Texas Instruments jumped 20%. Not a huge spread, you know.
As a rule, we Fools don't do market timing. "It's far better to buy a wonderful company at a fair price than a fair company at a wonderful price," says the Oracle of Omaha. Amen to that, brother.
And what we have in Texas Instruments is a wonderful chip builder at a fair price. You could of course just add the stock to your Watchlist and wait for the next irrational price drop, but I'm taking the next step. TI goes into my all-star CAPS portfolio with a big, green thumbs-up CAPScall right now. I expect this stock to serve me well for the next two or three years, when we'll head back into that inevitable next downswing.
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