Updated from 9:44 a.m. ESTTexas Instruments shares climbed Wednesday as two analysts raised their ratings from sell after the company reported a 14% increase in fourth-quarter sales. TI also beat bottom-line estimates by 2 cents thanks in part to a lower tax rate and indicated inventory issues are winding down, which should help margins in the current quarter. The company's shares were recently up $1.13, or 5.4%, at $22.25 after reaching as high as $22.52 in earlier trading. In what was hardly a ringing endorsement, Deutsche Bank analyst Ben Lynch raised his rating on TI to hold from sell, concluding "the worst is probably behind the company." Still, he said he remains bearish on TI's growth prospects in 2005 largely because he is also bearish about the overall semiconductor industry, and maintained significantly lower estimates for the year compared with the consensus among analysts polled by Thomson First Call. (Deutsche Bank has done both investment and non-investment banking business with TI.) Similarly, Merrill Lynch analyst Joseph Osha raised his rating to neutral from sell. He said he is no longer as concerned about unrealistic 2005 earnings expectations and thinks more of the bad news should now be reflected in the consensus earnings estimate. Still, he said he remains cautions on the semiconductor business overall and said his upgrade on TI was based entirely on the stock's improved valuation as the share price has declined. Osha noted a shift in his preference to TI over semi giant Intel ( INTC), noting that TI shares (before Wednesday's rise) were down 18% from a peak in December compared with an only 7% decline in Intel. He said he believes there's no potential upside to consensus earnings estimates for Intel while TI could see positive margin leverage as its sales mix shifts toward more profitable segments. (Osha has a neutral rating on Intel; his firm has done non-investment banking with TI.) Both analysts noted that without a tax benefit and other one-time adjustments, TI would have missed the consensus earnings estimate for the fourth quarter. The Dallas-based company reported net income of $490 million, or 28 cents a share, down from net income of $512 million, or 29 cents a share, a year earlier. The company benefited from a tax rate in the fourth quarter of 14%, lower than the previously expected rate of 21% due to resolution of several foreign tax items. Third-quarter revenue totaled $3.15 billion, a year-over-year increase of 14% and sequential decline of 3%. Analysts polled by Thomson First Call were expecting earnings of 26 cents a share on sales of $3.1 billion in the fourth quarter. In its midquarter update in December, the chipmaker narrowed its forecast range for earnings and revenue in the December quarter, projecting it would earn between 25 cents and 27 cents a share on sales ranging from $3.02 billion to $3.14 billion. That compared with prior guidance calling for earnings of 24 cents to 28 cents a share on sales ranging from $2.96 billion to $3.2 billion. Inventory -- a sore spot across the semiconductor sector for several months -- ended the quarter at $1.256 billion, a $100 million sequential decline due to lower factory loadings. Days of inventory at the end of the fourth quarter were 62, down from 69 days at the end of the prior quarter but up from 56 days at the end of 2003. TI's move to decrease factory loadings put a squeeze on margins. Gross profit margins in the fourth quarter amounted to 42.3% of revenue, down from 45.8% in the previous quarter due to seasonal declines in educational and productivity products and underutilization of the company's semiconductor assets as the company reduced inventory. The sequential decline in sales during the quarter was also tied to a seasonal decline in graphing calculators sold into the educational market, the company said.
Overall semiconductor revenue was $2.798 billion, virtually flat sequentially and up 14% from a year ago. That exceeded the company's latest projection calling for semiconductor revenue between $2.68 billion and $2.78 billion. But high-performance analog was down 11% sequentially as a result of inventory reduction in the distribution channel. "We believe distributors made good progress in reducing their inventories in the second half of 2004," CEO Rich Templeton said in a statement. "Likewise, TI moved aggressively in the fourth quarter to decrease factory loadings, which reduced our inventory by $100 million." On a postclose conference call, company executives said that TI's inventory has reached a desired level but that lead times are running short and visibility remains low. They said they believe that inventory pressure will continue but ultimately come to an end in the first quarter so that TI's shipments more accurately reflect demand. For the first quarter, TI predicted sales ranging from $2.9 billion to $3.14 billion, or roughly flat to down 8% sequentially, and earnings of 22 cents to 26 cents a share. That straddled the latest consensus estimate calling for first-quarter sales of $3.08 billion and earnings of 24 cents a share. Ron Slaymaker, head of investor relations, said TI expects average loadings or average utilization for the first quarter to be higher than the fourth quarter, which should benefit gross profit. Longer term, looking out a few years, CFO Kevin March said he believes that gross margin could reach 50%, and operating margin could reach 25%. Separately, the company announced that its board of directors authorized a $2 billion stock repurchase in addition to previous authorizations. The company bought back $753 million in TI common stock last year.