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Texas Instruments Incorporated

Posted on: Tuesday, 3 August 2004, 06:00 CDT

Opportunity in Technology Again?

A company like Texas Instruments Incorporated represents a dilemma for investors adhering to NAIC methods. It's part of a highly cyclical industry that's vulnerable to big shifts in demand for products incorporating the semiconductors and other electronic components the company sells.

Technological Advances. A Tl worker displays a 300-mm silicon wafer. Because they pack in more chips than the previous 200-mm size standard, the larger units represent a significant productivity boost.

On the other hand, the company has emerged from a three-year slump and is showing strong growth in sales and earnings. Even so, its mid-June share price is down about 26 percent from a mid- January peak, presenting a possible buying opportunity for investors who conclude its rapid growth can continue. Believing recent stock valuations may not accurately reflect the quality and growth potential of the company, members of Better Investing's Editorial Advisory and securities Review Committee chose Texas Instruments Incorporated as the August Undervalued Feature.

Chip Markets

Texas Instruments is a leading global supplier of semiconductors and other electronic products. The company operates in 25 countries, and more than 80 percent of sales in fiscal-year 2003 (ended Dec. 31, 2003) were derived from overseas customers.

The company's biggest business is its Semiconductor group, which accounted for 85 percent of fiscal 2003 sales. It's the world's leading supplier of digital signal processors - components that make possible highspeed transmission of signals in products such as cell phones. DSPs made by Texas Instruments are used in more than half the cell phones sold worldwide.

Texas Instruments is also No. 1 in production of analog devices - components that translate real-world signals such as light and sound into digital form. Analog components go into wireless devices, autos, computers, printers, consumer electronics and industrial equipment.

Ten percent of 2003 sales came from Sensors and Controls, which makes components used in home appliances, refrigeration equipment, industrial controls and heating, air conditioning and ventilation systems. The division also makes radio frequency identification systems that use miniaturized electronic tags to identify and track shipments and inventory.

The Educational and Productivity group provided the remaining 5 percent of sales. The division produces handheld calculators, software and educational technology.

Corporate Ancestry

Texas Instruments evolved from Geophysical Service, a New Jersey business launched in 1930. It was the first company to use seismic reflection technology in oil and natural gas exploration. In 1934 the business moved to Dallas, where Texas Instruments remains headquartered. The company manufactured military electronics during World War II, and in 1951 it adopted its current name. Texas Instruments was listed on the New York Stock Exchange in 1953.

It began making transistors under license in 1952, and in 1954 it built the first pocket-sized transistor radio. Texas Instruments has had several other firsts - the integrated circuit (co-founded in 1958), the handheld calculator (1967) and the single-chip microcomputer (1971).

Chairman Thomas J. Engibous, 51, has spent his entire career at Texas Instruments. he became president and CEO in 1996 and was named chairman in 1998. This year he turned over the posts of president and CEO to Richard K.Templeton, 45, another company veteran.

The March 2004 proxy statement reported that company insiders owned less than 1 percent of the 1.7 billion common shares outstanding. In April institutional investors held 70.5 percent, reports the Factiva financial data service.

White-Knuckle Ride?

Historically, semiconductor manufacturing has been subject to steep boom-and-bust cycles lasting five to seven years. Texas Instruments operates 11 manufacturing plants and plans to build another soon. The company doesn't plan to add a lot of capacity the next time demand spikes upward, however. Excess production is outsourced to "foundries" - plants making chips designed by client companies. That way, Texas Instruments avoids additional fixed costs that could hurt its results in the next bust.

A competitive challenge for chip-makers is keeping up with rapid advances in technology. Product cycles are short - about two years on average. As a consequence,Texas Instruments spent more than $1.7 billion on research and development in fiscal 2003 - almost 18 percent of 2003 sales and 8 percent more than in the previous year.

Financial Results

Excluding special items, Texas Instrument's net income came to $841 million in fiscal 2003 (ended Dec. 31, 2003), an increase of 117.3 percent from $387 million the previous year. Diluted earnings per share totaled $.48, compared with $.22 the year before. Sales totaled more than $9.8 billion, up 17.3 percent from $8.4 billion in fiscal 2002. The company generated almost $1.1 billion in free cash flow, up 10.5 percent from 2002's $974 million, reports Factiva.

For first-quarter 2004 (ended March 31, 2004), net income before special items totaled $367 million, up 213.7 percent from $117 million in the year-earlier period. Diluted, split-adjusted EPS totaled $.21, versus $.07 the year before. Revenues totaled more than $2.9 billion, up 33.9 percent from $2.2 billion in first- quarter 2003.

The company's quarterly dividend is fractionally more than $.02 - almost $.09 a year. Its board authorized 2-for-l stock splits in 1997, 1999 and 2000.

Performance Expectations

Near press time in mid-June, shares were being traded at $25.13. The stock's price at the time of selection was $24.34. At the recent share price the company's market capitalization stood at $42.6 billion. The stock's recent 52-week trading range was $17.21 to $33- 98.

In mid-April Value Line analyst Marina Livson projected 33- percent long-term annual earnings growth for the company, with diluted EPS of $.95 for fiscal 2004. Quicken.com reported analysts from 31 institutions follow the stock. Among those making estimates, the consensus was that the projected annual rate of earnings growth will average 20-percent over the next five years.

Based on EPS totaling $.62 for the four quarters ended March 31,2004, the price-earnings ratio was 40.5 in mid-June. With Value Line's projected EPS of $.95 for fiscal 2004, the P/E would be 26.5 at the recent share price.

Investors should bear in mind, however, that P/E ratios may be unreliable guides for analyzing the prospects of high-tech companies, which often sport high multiples. High P/Es may reflect relatively low earnings levels or investor response to high, unsustainable growth rates. Taking a look at cash flow per share therefore may prove useful.

The goal for the Undervalued Stock is a 20-percent increase in investment value (market appreciation plus any dividends) in 18 to 24 months. No investment recommendation is intended.

Featured Resources

Editor's note: For links to the following references, see the version of this article at the NAIC Web Site.

Articles available free online include the following:

* "Silibubble," Forbes, Jan. 12, 2004.

* "End in Sight for Semis' Struggle?" CNN/Money, May 7, 2004.

Texas Instruments is part of Value Line's semiconductor industry category. Other companies from the group that BI has profiled include:

* Intel Corporation, April 2002 Stock to Study.

* Linear Technology Corporation, November 1998 Stock to Study.

For some perspective on the industry, see the following BI features:

* "Babson Staff Letter," April 2004.

* "Technology Offers Risk and Opportunity,"August 2001 Undervalued Feature.

Texas Instruments has spent the past three years on BI's annual Top 200 list. It was ranked No. 164 in the nonscientific survey covered in the April 2004 issue, with a projected 427 clubs holding the stock in 2003. The company joined the list in April 2002 at No. 140, with a projected 575 clubs owning shares the previous year.

Texas Instruments Incorporated (www. ti.com) is traded on the New York Stock Exchange under the symbol TXN. For more information about the company, contact Ron Slqymaher, Vice President, Investor Relations, Texas Instruments Incorporated, 12500 Tl Boulevard, Dallas, TX 75266.

Reporting by Associate Editor Kevin Lamiman

Copyright National Association of Investment Clubs Aug 2004

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