Wireless Should Buoy Texas Instruments

Comments from Nokia raise hopes for a strong quarter from the chipmaker.
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Buoyed by brisk sales of cell-phone silicon,

Texas Instruments

(TXN) - Get Report

is expected to report a sturdy December quarter when it reports after the close Monday.

The chipmaker draws just under a third of its sales from the wireless sector, and TI's biggest customer, handset maker

Nokia

(NOK) - Get Report

, said last week that cell-phone volumes surged 20% in its latest quarter.

Against that backdrop, analysts expect TI to show year-over-year sales growth of 27%, based on the current consensus estimate for $2.7 billion. Net income should total 19 cents per share on a pro forma basis, up sharply from 6 cents a year ago.

Sunil Reddy, who owns the stock in the

Fifth Third Quality Growth fund he co-manages, thinks TI's broad portfolio provides a sweet spot amid an economic recovery. By end market, TI draws about 45% of sales from communications, including wireless; 35% from computing; 10% from industrial; and 5% each from the consumer and automotive sectors.

"Just now things are picking up as far as

information-technology spending," said Reddy. "On the computer side, I think a lot of people have increased their estimates so there's a nice base there. The consumer is still strong and communications is picking up ever so slightly."

Despite the market's heebie-jeebies on some chip valuations, Reddy says he isn't overly concerned about TI's price. The stock nearly doubled for the 12 months ended Jan. 22, rising 92%.

Based on Friday's close of $30.97, the stock trades at 25 times the 2005 consensus earnings estimate of $1.25, and 34 times the 2004 outlook.

"Understand this is a cyclical industry and things go to extremes, but I don't think we're there yet," said Reddy. "Our fund tends to hold things for a long time unless the fundamentals deteriorate, and we're nowhere close to that. I think in general people are thinking the second half will be slower but it's tough to see out that far."

As for TI's December quarter, Reddy said: "Everybody expects the top line will be decent. The question is how much leverage they'll be able to show. Companies where leverage isn't coming through are kind of being punished."

But on that front, analysts seem relatively bullish. At Sanders Morris Harris, analyst William Conroy predicts TI could show a rise in gross margins of 360 basis points from last quarter's 40.7% -- which, in turn, reflected a 3.2 percentage-point sequential rise. December quarter margin should benefit from higher revenue on a relatively flat depreciation base, Conroy says. (He owns TI shares; his firm hasn't done banking for the company.)

Longer term, Sanford Bernstein's Adam Parker says TI could see healthy gross margin expansion through 2005. He estimates gross margins will grow 260 basis points to 43.3% in the December quarter, but could grow to around 50% by 2005 if conditions stay robust.

Parker, who has a market perform rating on TI, argues the stock is already discounting the potential upside. He'd get more interested if the price came down -- say, if the market got scared about a wireless inventory buildup, an ever-present fear in the industry -- or if the analyst found reason to lift his earnings and gross margin outlook for TI. Sanford Bernstein doesn't do investment banking.

But Parker currently doesn't see any evidence of inventory buildup, and he expects TI to offer historically typical guidance for flattish March-quarter sales. Growth in the company's sensors and controls division should help offset a slight seasonal decline (of around 2%) in the semiconductor division, he predicted.

For chips in general, "the shape of the March quarter looks to be tracking more or less seasonally," pointed out Ben Easow, an analyst covering chip stocks for Northern Trust, which has a long position in TI.

But it's possible that TI could guide to a slightly better-than-usual business, Easow said, helped in part by a boost in average selling prices from the company's open-multimedia-applications platform, or OMAP, line of processors. The OMAP processors allow multimedia functions in high-end cell phones and personal digital assistants.

Likewise, Sanders Morris Harris predicts TI will guide sales to be flat to modestly up for the March quarter, slightly better than the consensus prediction for a slight revenue decline to $2.69 billion.