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Upbeat Outlook, Upgrade Fail to Lift Texas Instruments

The chipmaker touts strong sales and Deutsche Bank raises its recommendation. But shares stagnate.

A day after

Texas Instruments

(TXN) - Get Texas Instruments Incorporated Report

touted its strong position at its analyst meeting, and in the wake of a three-month drop in its stock, an analyst upgraded the chipmaker's shares Thursday.

Deutsche Bank analyst Ben Lynch raised his rating on TI to hold from sell, noting that the stock has dropped 17% in the past three months to his $26 price target.

After trading as high as $26.10 earlier, shares of Texas Instruments were recently down 26 cents, or 1%, at $25.72.

Texas Instruments is now trading at "less egregious" multiples of 24 times his 2005 earnings estimates and 3.4 times his sales estimates, Lynch wrote. Based on the consensus estimate -- which he disagrees with -- the stock is trading at 19 times forward earnings and 3.1 times sales. (Lynch's firm has done investment banking with TI.)

"We believe continued healthy wireless demand, strength in DLP

digital light processors as well as continued pricing improvements, bode well for the company's 2Q and 3Q," Lynch wrote.

But he tempered those positive comments with a bleaker view of the chip cycle -- the subject of much

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debate lately. "In the near term, we believe the market has discounted the risk of an imminent deceleration of the semi cycle," Lynch wrote.

Despite that outlook, Lynch praised TI for once again using its two-day analyst meeting to successfully showcase its management team, products, technology and strategy. On Wednesday, TI executives gave an optimistic outlook for the current quarter, citing strong demand for consumer and entertainment products. Lynch also highlighted the company's comments about its digital light processing and applications processor businesses.

However, the analyst believes the company's code division multiple access ramp is progressing only slowly. The company indicated that non-


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CDMA sales will still represent a small minority of the company's CDMA revenue in 2005, while Nokia's CDMA share is expected to stagnate around the current 20% level, limiting upside potential, Lynch wrote.

Lynch is also skeptical of TI's ability to exceed former peak operating margins -- having achieved 22.8% in 2000 -- in this cycle. He is forecasting 2005 costs to rise $427 million above those in 2000, and 2005 revenue to climb $1.47 billion higher than 2000 levels. "While TXN may be delivering on the top-line, the company is lacking the leverage most investors assign to the company, in our opinion," he wrote.

Not all analysts shared Lynch's views of TI and the semiconductor cycle, however.

"While we have seen component inventory levels increasing, we believe they are only lifting off of an unhealthy base, which would have simply resulted in continued shortages if buffers are not rebuilt," Legg Mason analyst Cody Acree wrote in a note Thursday. "We see no evidence that inventories have now grown to unhealthy levels." (At Wednesday's meeting, TI Chief Financial Officer Kevin March said the company had increased its inventory to meet future demand for its chips.)

Acree reiterated his buy rating, saying he believes TI is the best-positioned large-cap chip stock for the remainder of the growth cycle. Contrary to Lynch, he expects revenue upside from growing market share and greater dollar content per system, as well as profitability beyond current forecasts, driven in part by a richer mix of products. (Legg Mason hasn't done banking with TI.)