SAN FRANCISCO -- Back in January, analysts were calling Texas Instruments (TXN) - Get Report the Intel (INTC) - Get Report of the wireless world. Now that description seems more slur than flattery. Shares in the onetime maker of radio transistors and calculators have outperformed those of Intel this year by 54%.
While the Street seems split on Intel's near-term
prospects, critics of TI are hard to find. The stock is such a favorite these days that when it dropped 9% to 141 in two days last week,
analyst Joe Osha took the chance to upgrade it from near-term accumulate to buy. Osha, whose firm has no underwriting relationship with TI, believes the stock will rise to 180 within the next 12 months.
Thanks to a move toward chips for wireless phones and communications devices, that target is looking possible. "A couple of years in the future, this whole area of broadband access, digital modems and cable modems could be the fastest growing for TI," says Texas Instruments CFO William Aylesworth.
It's a different Texas Instruments that people are now buying into than the one they did when it traded low. That's why analysts like Osha feel the stock's 68% rise in the first half of 1999 hasn't left it expensive. "The past two quarters have reflected peoples' coming to understand what the new opportunities are," Osha says.
TI's newfound popularity in the tech sector is all the more interesting considering it's one of the oldest tech companies around. Texas Instruments dates back to the '50s, when it first came out with radio transistors. Later it sold mainly calculators, military parts and DRAMs, none of which are among today's sexier technology products.
But over the past two years, TI quietly rid itself of its memory business and military chips while making careful acquisitions focused around the market for digital signal processors, the brains inside communications devices such as cell phones and handheld computers. That's a market expected to grow by 25% in 2000 and 30% in 2001, according to industry research firm
It is a market expanding so greatly that even TI's closest competitors aren't much competition, says Will Strauss, a market analyst at Forward Concepts who has watched the DSP market since its inception in the early '60s.
, for example, sells its DSP chips mainly to Asian customers and to
in Europe for its washing machines. More than half of
DSP products go into its own product lines.
restricts its sales to giant communications companies, says Strauss.
Meanwhile a little over a fifth of the overall DSP market is off-the-shelf products, sold through distributors, and only ADI and Texas Instruments sell there. TI holds a 47% share of the DSP market, Strauss says, almost twice that of the next largest competitor -- Lucent -- which holds 27%.
"Today's cable modem does not have a DSP in it. Tomorrow's likely will have to," Aylesworth says. "If you look back four years, we all had analog modems and none had a DSP in them. Today almost every analog modem has a DSP."
DSPs give Texas Instruments a solid footing for the near term, says Aylesworth. The company is expected to end 1999 with an 80% growth in net income over 1998. Past that,
surveys of analysts predict a 27% earnings growth in 2000 and 26% in 2001. Compare that with the world's biggest maker of microprocessors, Intel, which is expected to grow its earnings 28% this year, 16% next year and 22% in 2001.
But the company has made a series of acquisitions that will provide growth past that, Aylesworth says. Acquisitions recently announced include
Libit Signal Processing
, a maker of cable modem chips that is seen as a potential
, a maker of software for TI's DSPs that enables transmission of voice, data and faxes over the Internet; and
Integrated Sensor Solutions
, which makes high-performance sensors for automotive and industrial equipment.
Those markets justify the stock's high price, says
CS First Boston
analyst Charlie Glavin. "It is trading at roughly 30 times next year's earnings and that's when a lot of new products kick in to fuel the growth," he says. "You will see increased silicon in automotives. People are looking at this and saying TI has reinvented itself as a digital communications company." CSFB isn't an underwriter of TI.
Nick Moore, a buy-side analyst with money management fund
Jurika & Voyles
, says the only risk with buying TI now is that the growth in cell phones, a large part of TI's business, will slow. Jurika & Voyles doubled its money on an investment in TI stock late last year and early this year, but Moore is kicking himself for selling off too early.
"TI is a fantastic company," says Moore. "But I was expecting a big tech correction. I should have stayed in because I knew it would outperform other tech stocks. It is the first thing I would buy back if it dropped further."