Texas Instruments' Guidance Is a Guessing Game

After warning, the second quarter looks doable. But how many wireless chips are piled up out there?
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Having already bummed out investors with a profit

warning in June,

Texas Instruments

(TXN) - Get Report

faces comfortably low expectations when it reports second-quarter results after the close Monday.

Most analysts think it can meet Wall Street's estimates for sales growth of just over 6% to $2.3 billion, with earnings per share of 6 cents for the quarter ending in June.

But there's far less confidence about whether TI can meet guidance for the quarter now under way, especially given a wireless inventory problem in the Chinese market. Complicating matters, analysts have penciled in abnormally high projections for the period, notes Deutsche Bank analyst Ben Lynch.

Over the last seven years, TI has typically seen third-quarter revenues stay about flat with the prior quarter. But this year consensus estimates call for sales to grow 5%, to $2.4 billion.

Lynch, who doubts TI can notch those numbers, is among the most bearish on the shares. He stuck a sell rating on the stock after the company warned last month.

But even the relatively optimistic pepper their comments with qualifiers, pointing to TI's own recent commentary. When the chipmaker

cut its sales and profit guidance last month, it blamed an inventory buildup of wireless chips in China that was exacerbated by the effects of SARS.

"Inventory issues are rarely single-quarter events, based on our experience," writes Fahnestock's Quinn Bolton in a note. His firm did not disclose a banking relationship with TI. Though he's betting TI can meet the consensus estimate on guidance, he concedes there's a fair amount of downside risk.

Wireless Woes

At the time it warned, TI forecast that its wireless-chip revenue (which accounts for about a third of semi sales) will slump 10% from the prior quarter, instead of showing the slight growth originally expected. Bolton and some other analysts think wireless sales could remain under pressure in the third quarter, too.

He's modeled for TI's wireless sales to resume growth on the order of about 6%, which compares to an average of 9% in the period. Still, Bolton says the Chinese market must work through an estimated 12 to 20 weeks of handset inventory before orders return to normal -- and that will pose a hurdle to TI.

Given the potential for shortfalls in wireless or other lines of business at TI, says Bolton, the chipmaker "has the highest likelihood of disappointing investors with its third-quarter guidance of any company in our coverage universe."

At Fulcrum, analyst Clark Fuhs likewise says inventory corrections are rarely contained to just one quarter. He acknowledges concern that TI may have built further inventory during the second quarter due to the falloff in wireless chipset sales. That would put downward pressure on utilization rates (a measure of factory productivity) and gross margins for the third quarter.

But Fuhs thinks TI will see enough demand to keep utilization rates stable. "Digital signal processors and analog integration that address high-volume consumer markets is the right place to be," he says in a note. Fuhs has a buy rating on the stock; his firm does no banking.

Lynch is far more skeptical about whether TI can escape the effects of the Chinese inventory overhang, suggesting it could remain a problem through the first half of the third quarter. "We think that will lead to low visibility, with TI therefore not wanting to provide particularly optimistic guidance," says Lynch.

On top of that, last week's profit warning from

Nokia

(NOK) - Get Report

, one of TI's major chip customers, likely signals trouble. "One of the key messages was that Nokia is coming under a lot of pricing and margin pressure," says Lynch. "And I know of no industry where when a customer's coming under margin pressure, they do not apply that back onto you."

"Much of TI's strong growth had been from higher-end products into Nokia. But with Nokia itself struggling, that has to have a direct bearing on TI," Lynch says.