Calling the bottom is great hobby in this business. And I don't think analysts, aka "bears" who spot ceilings early, receive enough credit for doing so. Well, here's my attempt: I'm calling the top here on Texas Instruments (TXN 5.64%). There's no way that these shares make sense at twenty-two times earnings. And it's less believable that the stock is at a 52-week high after such a disappointing quarter. While investors are applauding the company's 33% dividend hike, I see this as sheer desperation and a bid for time.
The company has no leverage. And I think management knows this, which is why it wants to pacify investors while adding support to the stock price. At $34 per share, the stock looks expensive both in terms of its earnings and free cash flow valuation. The forward P/E is at 16, which is higher than both Qualcomm (QCOM 1.41%) and Broadcom, which trade at 14 and 12, respectively. This is even after Qualcomm just posted a beat-and-raise quarter.
I get it. They are not vying for the same business. But it speaks to how overly optimistic investors have become on TI, which assumes a strong rebound in 2013. But the company is still reducing guidance and projects a 6% sequential revenue decline. And despite having invested heavily to build its capacity, TI has not shown that it is able to make the most of its resources. In the meantime, Qualcomm is raising guidance and revolutionizing an industry. And as NVIDIA is declaring war on the entire sector, TI is essentially saying, "We have no more neat ideas."
Granted, raising the dividend and share buybacks are good for investors. But it does not address the company's competitive deficiencies, nor does it say how it will get the top line growing again. Remarkably, despite its size, TI still struggles to produce meaningful leverage over analog rivals like Linear and ON Semiconductor. This is important since utilization and fixed labor costs are still impacting margins.
The company's focus on the slow-growth analog area, which now comprises roughly 53% of its revenue, is still a concern. I'm sure management knows what it's doing. But TI has completely exited the booming mobile device market. Essentially, this is a chip company that is heading in the wrong direction. Placing a bet here on TI assumes that this company will return to 2006 growth levels. That's not going to happen. So what then, are investors betting on at such a premium? The top line continues to drop and margins are being squeezed. I would take some profits off the top here and instead look to Qualcomm and Broadcom to capitalize on the wireless/mobile growth.
