Texas Instruments (TXN 0.02%) posted a good fourth quarter by beating Street expectations on revenue and matching expectations on earnings. However, its earnings forecast for the ongoing quarter fell behind consensus estimates as Texas Instruments will be taking restructuring charges as it moves away from the unprofitable areas of its business. It is planning to eliminate around 1,000 jobs worldwide as a part of its cost cutting strategy.
But overall, the company is on the right track and looks good for the long run, and at the same time looks like a better pick than other analog and embedded chipmakers like Analog Devices (ADI 1.14%) and Avago Technologies (AVGO +0.88%).
Earnings review
Texas Instruments finished last fiscal year strongly. Revenue rose to $3.03 billion from $2.98 billion in the same quarter last year. This was above analysts' expectations of $2.98 billion. The company reported a gross margin of 54.2%, and profits jumped 94% in the fourth quarter to $0.46 per share, at par with estimates.
The revenue forecast for the current quarter is between $2.83 billion-$3.07 billion, just below the $2.96 billion consensus estimate at the midpoint. However, earnings per share are expected in the range of $0.36 to $0.44 per share, trailing the $0.44 consensus estimate. But beyond this short-term issue, Texas Instruments has a bright future.
Market opportunity
Texas Instruments manufactures chips that are used in various parts, ranging from satellites to home appliances. This provides it with ample growth opportunity across different areas. The company is seeing good growth in communications equipment and enterprise systems, and it is also expecting improvements in the automotive business in the future as vehicle manufacturers make their cars smarter.
Texas Instruments is seeing good business in its core products such as embedded processors and analog chips. In the previous quarter, analog revenue grew 12%, while embedded revenue grew 11% year over year, along with growth in operating margins. The growth in embedded processors was on account of strength in microcontrollers. Texas Instruments has also improved its factory utilization by increasing load in advanced factories and closing old, inefficient factories.
Looking ahead, Texas Instruments could benefit from an increase in global auto sales. The U.S. auto market is expected to grow once again this year with sales between 16 million and 16.5 million units, while LMC Automotive puts the global growth forecast at 5%. The increasing use of semiconductors in mobile devices could help Texas Instruments' revenue growth in the future, and the focus on cost reductions should result in margin improvement.
Manufacturing and consumer confidence also improved last month, suggesting an improvement in sentiment. As a result, Texas Instruments will be able to count on one more growth driver in the future as industrial production and manufacturing improves.
Restructuring moves
But in spite of steady growth, Texas Instruments is undergoing a restructuring phase. As a result, it has eliminated around 1,100 jobs worldwide, equal to 3% of its workforce. It expects this to result in annual savings of around $130 million by 2014. The restructuring will result in charges of $80 million, of which $49 million was incurred in the fourth quarter. This restructuring is very important since it will allow Texas Instruments to become a more profitable entity in the long run.
Texas Instruments has already exited the mobile chip business and is instead targeting embedded processors and analog chips, such as those used in automotive and industrial equipment. Also, Texas Instruments plans to downsize its operations in Japan, as the Japanese market has provided limited opportunities for the company over the years. Chief Financial Officer Kevin March said:
In the case of Japan, the size of the market there has been declining for a number of years. Technology markets mature from time to time and you have to rebalance where you spend your money.
So we can say that Texas Instruments' strategy of lowering headcount and reducing operations in certain unprofitable areas is a good one.
Valuation
From a valuation perspective, Texas Instruments is attractively valued as compared to industry peers as the table below shows.
|
Company |
Trailing P/E |
Forward P/E |
Expected 5-yr. growth CAGR |
|---|---|---|---|
|
Texas Instruments |
23.70 |
18.78 |
10.80% |
|
Analog Devices |
23.29 |
19.54 |
11.67% |
|
Avago |
28.55 |
16.29 |
15% |
Credit: Yahoo Finance
Comparing Texas Instruments and Analog Devices, we see that both are equally valued on the trailing P/E metric. But on forward P/E, Texas Instruments is better. There is also not much difference in the profit margin, but an investment in Analog Devices isn't encouraging at this point because the company has seen insider selling of late. Analog CEO Vincent Roche recently sold 8,000 shares of the company, which is a discouraging sign for potential investors.
Avago, on the other hand, is quite expensive. But as seen above, its earnings growth projection is quite bright as the gap between the trailing and the forward P/E shows. So conservative investors might be put off by the high valuation, while Avago's dividend yield of 1.60% is also less than Texas Instruments' 2.70%.
Bottom line
All in all, Texas Instruments looks like a decent investment from various angles. It is focusing on growing the profitable areas of its business and reducing unnecessary overhead. The industry conditions are also looking good, so Texas Instruments could be a good purchase for the future.
