Texas Instruments Frustrates Mo-Mo Crowd

Shares fall because of high expectations going into Monday night's midquarter update.
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Texas Instruments

(TXN) - Get Report

provided its midquarter update last night, and this morning you'll get any number of interpretations on whether the glass is half-full or half-empty. These interpretations should correlate directly with analysts' opinions on the stock or on the group. I'd be quite surprised if anyone changed his opinion on the basis of the information gleaned from the call, because midquarter updates are generally devoid of many details.

Essentially, the company narrowed guidance toward the upper end of the prior range. Revenue is now expected to be in the $3.22 billion to $3.35 billion range vs. prior targets of $3.11 billion to $3.38 billion. Semiconductors should range from $3.15 billion to $3.28 billion vs. the previous range of $3.05 billion to $3.30 billion.

Revenue in the entertainment and productivity division will be $65 million to $75 million vs. prior expectations of $60 million to $80 million. GAAP EPS should be in the range of 31 cents to 33 cents (vs. prior guidance of 29 cents to 33 cents), and this includes 4 cents of stock-based compensation. Street consensus going into the call was $3.27 billion and 32 cents, and I believe it's fair to say it had been inching up recently.

Half-Full

The bulls on the stock will point to strong demand for wireless (handset and infrastructure), communications in general and high-performance analog, or HPA. The book-to-bill ratio is above 1, and all geographies are above plan.

Overall, demand is running stronger than the company had anticipated in its January conference call. Lead times remain stable, some ASPs are up because of mix changes (not price increases), and the company spends a lot of time scrubbing its order book to detect excess enthusiasm.

OEM inventories are low, TXN inventories are low, and distributors are starting to rebuild some inventory after draining it for five consecutive quarters. From where the company sits today, it expects business to be "up" in the second quarter.

Half-Empty

The bears on the stock and the sector will jump on all the usual factoids. At least one will reiterate claims that margins are approaching historic peaks. While that may be factually correct from a historical perspective, TXN's "asset-light" business model is new and has yet to be put through a complete business cycle.

Given the market opportunities that did not exist years ago, and in light of the new model, I'm not certain management knows the limits on margins. Consequently, the way outsiders ascertain these limits always amazes me.

Inventories will also be a focal point of the bear crowd. They'll cite the rebuilding of inventories by distributors as a clear sign of a top. After all, semi companies and the channel always overestimate demand, don't they?

From my perspective, what will weigh on the stock today is simple: Expectations were very positive going into the call, and few will have cause to raise their estimates. When you can't tweak the spreadsheet higher, don't expect much from the stock.

But the bottom line is that this is still the best-positioned semiconductor company in the industry.

Bob Faulkner has been in the investment business for 18 years with an exclusive focus on technology stocks. He started as a sell-side analyst with Wood Gundy and Alex. Brown & Sons. In 1990, he moved to the asset management side with portfolio management/analytical positions at 1838 Investment Advisors and Merrill Lynch. Bob has an M.B.A. from Seton Hall and a B.S. from Waynesburg College.