Texas Instruments Hums

The stock's huge run-up may not be over as the chipmaker heads into its strongest part of the year.
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Texas Instruments

(TXN) - Get Report

investors bid shares to a 17-month high Tuesday as the chipmaker's business

rebounded strongly in the second quarter, and the good times may not be over.

The company's results have clearly translated into its stock, which was recently up more than 5% Tuesday and has gained more than 30% this year, as TI heads into the strongest part of the year.

The world's third-largest chipmaker reported broad-based demand for its semiconductors as orders rose 15% sequentially. Also, TI's chip unit reported a book-to-bill ratio of 1.07 to 1, its only reading above 1 since the first quarter 2004.

"Taken in combination, this gives us a high level of confidence that we should be able to continue our strong growth into the third quarter," said CFO Kevin March late Monday. He said chip orders accelerated in June, following two good months to start the quarter, and that strength has continued into July.

For the third quarter, TI predicted that sequential chip revenue would grow between 2.7% and 11%. Overall company revenue growth is expected to be between 1.6% and 10%, suggesting a range of $3.29 billion and $3.56 billion. Earnings are expected between 31 cents and 35 cents a share, including a 3-cents-a-share impact stemming from employee stock options.

The current period offers some upside room to Wall Street's present targets, which average out at earnings of 33 cents a share and sales of $3.4 billion. Analysts were optimistic on Tuesday about the potential for the chipmaker to hit the high end of its goals.

"Our checks over the last month suggest a very strong September quarter," said analyst Apjit Walia with RBC Capital Markets. "We believe management's guidance could end up being conservative, given the strength we are picking up in the channel for TI."

He said in his research note, however, that the recent rally in the stock had already incorporated this apparent strength and that he thought shares were fully valued at present. Walia's firm had no stake or banking relationship related to TI.

Not coincidentally, Tuesday's gains lifted shares of TI to their highest level since the beginning of 2004 -- the last time TI said business was this good.

A significant factor in the company's second-quarter earnings performance was the fall-through from higher revenue and lower costs. March said 4 cents of its earnings per share stemmed from higher sales and another nickel in EPS came from manufacturing cost reductions and efficiencies. TI reported earnings of 32 cents a share when excluding tax-related items, vs. Wall Street's expectations for earnings of 29 cents a share.

Just as important, gross margin of 47% and operating margin of 20.6% climbed in the quarter and moved closer to the company's long-term targets of 50% gross and 25% operating margins.

March said the company is benefiting from the reorganization and divestiture earlier this year of its lower-margin businesses, including the LCD driver business. Better demand also helps. "With orders up across the board, we're able to increase factory utilization so we can get more cost efficiencies," March said.

The potential for additional gains in the stock comes from a further push in its sales and earnings. With momentum already in the company's direction, this is a very distinct possibility.