TI Rises After Wireless Avoids Disaster

Texas Instruments' wireless business didn't do as badly as some feared.
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Updated from July 21

Tuesday investors were bidding up

Texas Instruments

(TXN) - Get Report

shares, grateful the semiconductor company had sidestepped the morass that has bogged down many of the wireless-dependent companies. In recent trading, TI's shares were up the stock $1.31 or 7.3% to $19.19.

After rattling investors with a profit warning in June, Texas Instrument Monday offered a little relief, turning in second-quarter sales in line with expectations with a penny upside on earnings. Guidance was on par with Wall Street's consensus numbers -- a plus for investors who'd girded for bad news.

Lehman analyst Dan Niles awarded TI by upgrading it two levels, from underweight to overweight -- the first action he's taken since going negative on the shares back in June of 2000. Though he slightly lowered earnings per share estimates for calendar year 2003 and 2004, Niles said he thinks this will be the last EPS cut of this year for TI. "We believe the next EPS revision will be up with gross margins higher at the peak in this upcycle than the last," he wrote in a research note. "Given that wireless inventories are being worked down in Asia-Pacific" -- removing a hurdle that has lately weighed on TI's business -- "we believe that TI has the operating leverage to improve long-term EPS growth."

Besides improvement on the inventory front, Niles explained his upgrade by pointing to improving demand in Asia, post SARS; new revenue potential as TI enters the standard chipset CDMA market in the second half of the year; and progress in manufacturing efficiency.

Niles added that the TI upgrade fits into his strategy of gradually upgrading individual semiconductor names since he raised his rating on the entire sector last summer. Lehman has done banking for TI.

TI's second quarter "could have been a lot worse," summed up Legg Mason's Cody Acree, pointing out that the wireless sales decline of 5% from the prior quarter was better than the 10% TI predicted in its June warning. "There was a real risk that given Motorola's caution, Nokia's caution that TI was going to significantly disappoint."

Instead, he says, "They gave a range that allowed for numbers below but also in line with Street estimates. It wasn't a blow-away number but after a preannouncement you wouldn't expect that. I think it probably eliminated some of the fear that this would be a disaster."

Acree has a buy on the stock; his firm has no banking relations with TI.

But there was also dissent to those upbeat views. At Sanford Bernstein, Adam Parker complained, "There is no compelling valuation argument for TXN at these levels, and downward revisions for the back half of 2003 and 2004 will come from this earnings report." Moreover, he said he doubts whether TI can grow its topline faster than the industry over the next few years.

Parker has a market perform rating on the stock with a $17 price target.

TI posted sales of $2.3 billion for the period ended in June, up 8% from a year ago.

Quarterly profits totaled $121 million, up 27% from a year ago. EPS of 7 cents was a penny above expectations.

"We would think the extreme market weakness in mid-Q2 in Asia from SARS is certainly abating. We would be cautiously optimistic that the worst may be behind us in Asia, at least for the near term," said chief financial officer Bill Aylesworth. "At the same time," he added, "it's still the case that customers in Asia have excess inventories of handsets so there clearly are cross currents to how that will play out in the third quarter."

In the second quarter, TI said its semiconductor sales were up 9% from last year's levels. Chips gained 3% sequentially, a little ahead of TI's revised guidance. Initially the company was hoping chips would grow 4% from the prior quarter.

Last week's profit warning from

Nokia

(NOK) - Get Report

, one of TI's biggest chip customers, has raised worries that the handset maker would in turn put pricing pressure on TI. But Aylesworth said high-end 2.5G handset silicon continues to command a hefty premium over standard 2G chips, which has helped wireless revenue growth outpace unit growth over the past year. Wireless units grew "several points lower" than overall year-on-year growth of 16% in wireless revenues, he said.

TI's other two main business lines -- sensors and controls, and calculators -- each saw sales growth of 4% from a year ago.

The company's utilization rate, which shows the percentage of its manufacturing capacity in use, stayed about the same as in the prior quarter, at just over the mid-70s, Aylesworth said.

Asked to comment on the semiconductor industry's prospects, Aylesworth said, "Clearly we're up from the bottom but in a slow continuing improvement after a bounce-back from the trough of 2001 and some pretty weak worldwide market conditions. That's not all that unusual compared to previous semiconductor cycles."

In the past, said Aylesworth, he'd witnessed a "a bounce-back then a period of pretty slow growth. Then one or more applications take off largely unanticipated til the rally starts to run, then there's a surge of growth again. I would say there's no reason not to expect that to happen again this time."

For the September quarter, TI said it expects total revenue in the range of $2.29 billion to $2.49 billion. The midpoint of that range, $2.39 billion, is a hair below Wall Street expectations for $2.41 billion.

Aylesworth told TSC that the degree of uncertainty reflected in the range of sales guidance is due not to potential pressure from Nokia, but rather to a lack of clarity about inventory in Asia. "Wireless customers in Asia we believe still have excess inventories of handsets, so it's very difficult to forecast at which rate the remaining excess gets liquidated. I really think the worst is behind them." He added that the inventory buildup is largely made up of older 2G handsets -- not the 2.5G goods for which TI commands a premium.

"I'm not aware of any near-term changes that we should report as a result of anything

Nokia is seeing," he added.

Semiconductor revenue is expected to fall between $1.89 billion and $2.05 billion, compared to second quarter revenue of $1.93 billion.

On an earnings basis, September quarter profit should fall between 19 cents and 23 cents per share, including a 13 cents per share contribution from a previously announced sale of 24.7 million shares of

Micron

(MU) - Get Report

common stock.

On a pro forma basis, Wall Street was gearing for EPS of 11 cents.