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Texas Instruments: Solid Quarter, but Pricey Stock

Stocks in this article: TXN INTC QCOM ATML NVDA BRCM

NEW YORK ( TheStreet) -- Shares of Texas Instruments (TXN) are up 5% this morning, hitting 52-week highs following the company's second-quarter earnings report after the bell Monday, but were the results really that good?

In a recent article, I told you that shares of Texas Instruments, despite the company's meaningful improvements, were due for a breather.

The stock price -- with an earnings multiple higher than those of Intel (INTC) and Qualcomm (QCOM) -- didn't make sense to me.

Investors were too optimistic about a company that has posted revenue declines for the past six quarters. TI investors likely won't appreciate this, but hold your emails for a second. Look, I won't discount that the company is in the midst of transforming its business. I also realize that management is pushing the company to become a leader in analog and embedded processing.

I also understand that it's going to take time to fully exit the realm of smartphones while management work to streamline the operation. I get all of that. But as I've said many times before, investors are too eager to wait for Texas Instruments to get its house in order while ignoring other growth opportunities like Atmel (ATML) and Nvidia (NVDA).

Today, TI investors are cheering "I told you so" after the company's second-quarter results, but the company only met lowered expectations.

The profit increase of 48% was impressive. TI has been cutting costs, including a 19% reduction in research and development. Earnings of 58 cents beat estimates, but I wouldn't get carried away.

On an adjusted basis, which strips out a gain of 16 cents related to the transfer of wireless connectivity technology, earnings were 42 cents per share, which met the the company's lowered estimate of 39 cents and 43 cents per share. Revenue -- my biggest source of concern for this company -- fell again by nearly 9% to $3.05 billion, the seventh consecutive quarter of a year-over-year decline.

Bulls will argue that revenue was within the company's estimated range of $2.99 billion to $3.11 billion. But it still missed the Street's expectations of $3.06 billion, which was already lowered, although, to be fair, this quarter's revenue decline had much to do with the company's shift from the wireless business.

The company is making decent strides in producing processors for new markets, which included industries like automotive. The company is heading in the right direction and investors have every right to put their faith in the company's management.

But this is also a story about valuation. The stock is expensive, compared with strong mobile performers such as Qualcomm and Broadcom (BRCM). TI's P/E is 24, compared with 17 for Qualcomm and 22 for Broadcom. Intel's is 12, and Nvidia's is 15.

So while Texas Instruments' improved margins were impressive, I don't believe that the stock warrants the premium it is carrying.

At the time of publication, the author held no position in any of the stocks mentioned.

This article was written by an independent contributor, separate from TheStreet's regular news coverage.

Richard Saintvilus is a private investor with an information technology and engineering background and the founder and producer of the investor Web site Saint's Sense. He has been investing and trading for over 15 years. He employs conservative strategies in assessing equities and appraising value while minimizing downside risk. His decisions are based in part on management, growth prospects, return on equity and price-to-earnings as well as macroeconomic factors. He is an investor who seeks opportunities whether on the long or short side and believes in changing positions as information changes.

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