Sell Texas Instruments' Warning, Buy Atmel's Promise

NEW YORK (TheStreet) -- There wasn't a lot of applause when I last discussed the state of Texas Instruments (TXN), which has been marred by declining revenue for many quarters.

That hadn't prevented the stock from posting impressive gains. But when the stock reached a new 52-week high last month, I told investors to lighten their positions because the semiconductor giant was due for a breather.

In that article, I said:

"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 (INTC), much less Qualcomm (QCOM). Taking a position doesn't make much sense here."

That reference angered several investors, many of whom didn't' appreciate my matter-of-fact delivery. But since that article, not only have shares of Texas Instruments fallen by more than 5% but the company just issued a revised downbeat guidance that caused investors to panic.

For the quarter ending June 30, the company now expects to earn between 39 cents and 43 cents per share on revenue of $2.99 billion to $3.11 billion. In April, Texas Instruments had guided for profits of 37 cents to 45 cents per share, while revenue (for the current quarter) was expected to come in the range of $2.93 billion to $3.17 billion.

According to FactSet, the Street consensus for net income is at 41 cents per share on revenue of $3.06 billion. The issue is not whether the company will meet this revised target -- I believe that it can. Investors should begin to focus on when exactly revenue will start trending in the right direction again.

While I do understand the company is in the midst of transforming its business to become a leader in Analog and Embedded Processing, I worry investors are waiting too patiently while other growth opportunities are passing by. It doesn't help the company just completed its sixth consecutive quarter of revenue decline. With revised guidance, that streak will likely continue.

Meanwhile, investors are ignoring the rebounding potential in Atmel ( ATML), which up 20% so far on the year. Unlike Texas Instruments' slow-moving progress in analog devices, Atmel's microcontroller business has been gaining plenty of traction.

Atmel's growing maXTouch business, coupled with the company's renewed focus on profitability by recently unveiling several products such as the mXT450S aimed at generating higher margins, makes Atmel's growth prospects all the more interesting.

While there are still some obstacles to overcome, I'm encouraged by the fact that Atmel's latest maXTouch solutions have picked up new design wins and continues to gain momentum in "non-traditional" touch devices/products such as automotive applications.

As much as I like Atmel's future prospects, I don't believe that the stock is cheap when compared to Qualcomm or Broadcom ( BRCM). However, when matched up with Texas Instruments, which trades at almost 17-times fiscal 2014 estimates, Atmel's forward P/E of 13 seems more attractive, given their respective business transitions.

I don't want to make this sound as if I'm beating up on Texas Instruments, though. I believe the company is heading in the right direction and I have complete faith in management's ability to execute the transition towards Embedded Processing.

However, I just don't believe the company's current situation deserves the premiums the stock commands, not when gross margins are also on the decline. Accordingly, I would still be a seller here at $35 per share and above, and I would look to a better rebound potential in a company like Atmel, which is showing more promise.

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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