I will concede there is now less competition in TI's core analog business, which should propel better margins in the long term. But it doesn't appear as if such robust margin leverage is imminent, given that gross margins just declined by 2.5% year over year while shedding 1% sequentially (missing the consensus). More than the revenue decline, the erosion in margin makes me question the stock's resiliency.

The quarter wasn't all bad, however. I do appreciate TXN is in a period of transition. The fact that the Analog and Embedded Processing business now comprise of 77% of the company's revenue, which is 5% higher year over year, seems to be trending in a manner that suits the company's objectives.

I'm willing to give management credit for having established a sound business model, which is producing $3 billion in free cash flow.

The question is to what extent can management propel the company further by focusing solely on analog chips? While it does appear that the cash is coming in handsomely, including a 16% year-over-year increase in the first quarter, the fact that gross margin declined does not inspire confidence. This is while operating income also declined by about 1%, missing Street estimates by almost 5%.

Bottom Line

With the stock up 20% so far on the year, I would be taking some money off the table at this level. Although Texas Instrument offers an excellent yield, shares are just too expensive. There is no way that this company should command a higher P/E than Intel, much less Qualcomm. Taking a position doesn't make much sense here.

At the time of publication the author had 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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