Archive: Texas Instruments (TXN)

MSCC: MicroSemi is My Least Favorite Semiconductor Play

The following is a reprint of my January 8, 2008 RealMoney column.

In other articles, I have outlined the reasons why I think the semiconductor industry is poised for strong stock performance and why I think MEMC Electronic Materials (MEMC) is the best play on the sector.

But I also realize that a bullish semiconductor outlook right now involves making a grab at that falling knife. Therefore, I thought I should also let people know which semiconductor stock looks most vulnerable to a downturn.

I think that stock is Microsemi (MSCC).

Microsemi is a leading designer, manufacturer and marketer of high performance analog and mixed-signal integrated circuits and high-reliability semiconductors. Its products manage and control or regulate power, protect against transient voltage spikes and transmit, receive and amplify signals.

Microsemi has held up fairly well, handily beating the performance of the Semiconductor HOLDRs (SMH) over the last year. This may be due largely to its strong end markets, which include defense, commercial aerospace, industrial/semicap, medical, mobile connectivity and notebooks, monitors and LCD televisions.

More Questions Than Answers

To me, however, the strong end markets only raise questions concerning Microsemi’s fundamental performance. For example, with such strong end markets, why did its cash from operations fall by more than half in the year ended September 30, 2007, compared with the prior year? Why is its inventory rising faster than sales, and why is its gross margin slipping?

I turned to the company’s latest 10K in hope of finding answers.

To begin with, the area is highly competitive. According to the 10K (emphasis added), “some of our current major competitors are Freescale Semiconductor, Inc., National Semiconductor Corp. (NSM), Texas Instruments, Inc. (TXN - Annual Report), Koninklijke Philips Electronics (PHG), ON Semiconductor Corp. (ONNN), Fairchild Semiconductor International, Inc. (FCS), Micrel Incorporated (MCRL), International Rectifier Corp. (IRF), Semtech Corp. (SMTC), Linear Technology Corp. (LLTC), Maxim Integrated Products, Inc. (MXIM), Skyworks Solutions, Inc. (SWKS), Diodes, Inc. (DIOD - Annual Report), Vishay Intertechnology, Inc. (VSH), O2Micro International, Ltd. (OIIM) and Monolithic Power Systems, Inc. (MPWR).” Gosh, I wouldn’t want them to leave anyone out.

Yet competition is just the third risk factor among a list that runs more than 12 pages.

The company notes the decline in net income related to non-cash acquisition related charges, restructuring charges and other factors. Yet non-cash charges don’t quite explain the decline in cash flow from operating activity. Furthermore, with “non-recurring” charges being reported in each of the last three years I’m going to go out on a limb and say investors can probably expect more of them in the future.

A Questionable Acquisition

According to the 10K, the company completed a merger with PowerDsine on January 9, 2007 and subsequently renamed PowerDsine Ltd., Microsemi Corp. – Analog Mixed Signal Group, Ltd. (”AMSGL”). Later, it notes that it “provided a valuation allowance of approximately $9,534,000 as of September 30, 2007 on all of our net deferred tax assets related to AMSGL as we have determined that it was more likely than not that the deferred tax assets would not be realized.”

Deferred tax assets are realized when the company earns taxable income in future periods. I’m not a big fan of acquiring companies that will “more likely than not” fail to earn taxable income in the future. This was one of the contributors to the decline in cash flow.

Microsemi’s gross margin weakened in the latest quarter (see chart.)

memcgrossmargin1.jpg

Source: Zacks Research Wizard, compiled by William A. Trent

I think there is additional margin risk stemming from burgeoning inventory levels.

memcdsi1.jpg

Source: Zacks Research Wizard, compiled by William A. Trent

Since a large percentage of costs at semiconductor companies is fixed, producing more units results in a lower cost per unit and higher profit margins. But many of the additional units Microsemi is producing are going into inventory rather than the hands of customers.

At some point, Microsemi is going to have to sell that inventory (by producing less than customers demand.) That will reverse the positive effect on future gross margins.

Valuation Too High

All this would matter less if the stock looked cheap. But on the basis of free cash flow yield, which is my favored metric, Microsemi looks more expensive than most of its peers.

Free cash flow in 2007 was less than $4 million. On an enterprise value of $1.56 billion, that amounts to a free cash flow yield of just 0.25%. The cash flow would have to grow 150-fold just to bring the yield on par with that of Treasury bonds.

Even using the company’s best cash flow on record ($36.5 million in 2006) the yield is just 2.35% – nearly a percentage point below that of Treasuries. If I thought the company could return to the 2006 cash flow level, then grow at the forecast rate, I would be willing to consider an investment.

But given the rising inventory, unprofitable acquisition and potential for further declines in gross margin, I won’t be holding my breath.

Disclosures: William Trent is long Semiconductor HOLDRS (SMH) and Maxim Integrated Products (MXIM). He holds put options against shares of Lam Research (LRCX).

William Trent currently owns put options against the shares of Lam Research (LRCX).

Topics: Audio and Video Equipment, Diodes (DIOD), Fairchild Semiconductor (FCS), Freescale (FSL), International Rectifier (IRF), Koninklijke Philips Electronics (PHG), Lam Research (LRCX), Linear Technology (LLTC), MCRL, Maxim Integrated Products (MXIM), Monolithic Power (MPWR), National Semiconductor (NSM), O2 Micro International (OIIM), ON Semiconductor (ONNN), ProShares Ultra Semiconductors (USD), Semiconductor HOLDRS (SMH), Semiconductors, Semtech (SMTC), Skyworks Solutions (SWKS), Texas Instruments (TXN), Vishay Intertechnology (VSH) | No Comments

Semiconductor Pricing Near a Bottom?

I warned most of last year that building oversupply would harm pricing for semiconductors, and the latest PPI data bear that out.
PPI for semiconductors

Pricing is the worst it has been since late 2003, which in turn was the worst it has ever been. But I think the fundamental outlook is improving, and my updated supply and demand model shows that late 2003 was actually quite a good time to own semiconductor stocks. You can never be too sure, though, so I decided to review the recent conference calls from a broad range of semiconductor manufacturers to get their sense of market conditions.

Intel (INTC - Annual Report) is seeing a shift in where the pricing pressure is coming.

Now, as far as the pricing environment. It was a more competitive pricing environment than we thought in Q2, and we expect it to continue to be somewhat competitive which is what you’re seeing in our margin outlook for the year. We believe the best defense against the competitive price environment is better product.

If you look at what’s happening with us the last year, you’ve seen better products quarter by quarter by quarter. You’ve seen improved product differentiation, 45 nanometer coming out; the Penryn product family, as Paul talked about. So what you’re seeing is Intel’s commitment and focus to making our products better and better and better which is the best defense we have in a competitive pricing situation.

Glen Yeung – Citigroup

Andy, is the pricing pressure the same now as it has been all year? Is it getting worse or getting better?

Paul Otellini

I would say it is different, Glen. It is much more targeted now at the low end of the desktop and even a little bit of the notebook marketplace, and a year ago it was higher in the stacks in many areas.

(Excerpt from full INTC conference call transcript)

Altera (ALTR) is deciding that in some cases they just won’t take it anymore.

There are pieces of business that we do look at, that we do turn down, because we don’t think that they are profitable today or will ever be profitable pieces of business for us to entertain. As an example in Q1 we looked at two pieces of consumer business, where the pricing expectation and requirement for the customer was not something that we could support. And so, we told the customer, we were not interested in participating in the business going forward.

(Excerpt from full ALTR conference call transcript)

Texas Instruments (TXN - Annual Report) wants to avoid competition where possible.

Jim Covello – Goldman Sachs

Okay. And then maybe my final question. Just on the analog side, you guys are obviously doing a terrific job picking up share. You talked at the Analyst Meeting in very clear terms about the strategy for doing that and a lot of the share gain is kind of coming from that third bucket you described at the Analyst Meeting, the smaller customers where you have the scale and mask to you need to go after customers that maybe your competitors don’t have the same scale and mask to go after. What kind of competitive response are you expecting from the rest of the analog industry, as they try and stop you guys on your continued share gain impact? Thanks a lot.

Kevin March

Jim I guess, I would comment on that, we have already been seeing competitive response but I think the difficulty for our competitors again has to do with scale, that is we have a sales force that is such that we can just simply touch a lot more customers than any of our competitors can touch at a one point in time. We added to that the breath of our total product offering that we have and we can literally solve almost any problem that a customer may have on a particular Board that they’re may be designing, which allows them to really solve their problem fairly quickly with solutions that we have as opposed to having multiple vendors in. Those are probably two elements of the position that we enjoy today and we’ll enjoy in the future that we would expect to be quite difficult for our competitors to really be able to overcome, so we remained confident that our objectives to growing our positions in analog are really pretty solid and within our reach.

(Excerpt from full TXN conference call transcript)

All in all, it seems that management teams are seeing the competitive pressures that are reflected in the PPI, and are responding to them. Their response, I believe, will improve the industry’s fundamental balance and result in better pricing and better stock prices.

Disclosure: William Trent holds put options on the shares of Lam Research (LRCX) and has a short position in put options related to the Semiconductor HOLDRs ETF (SMH).

William Trent currently owns put options against the shares of Lam Research (LRCX).

Topics: Altera (ALTR), Economy, Intel (INTC), Maxim Integrated Products (MXIM), Producer Price Index, Semiconductors, Texas Instruments (TXN) | No Comments

TXN: Texas Instruments Inventory Correction Not Corrected

Presented at the IBN Stocks and Investing Festival.

Texas Instruments Incorporated (TXN - Annual Report) reported revenue of $3.42 billion for the second quarter of 2007. According to the company, revenue increased 7 percent compared with the prior quarter as demand for the company’s semiconductor products began to rebound following an inventory correction in the semiconductor market.

That statement, of course, led me straight to the balance sheet to see how much the correction improved their inventory situation. Imagine my surprise when I saw that inventories were actually up during the quarter, to $1.42 billion. The sequential increase of 1% was smaller than the increase in sales, but the year/year increase of 7% was against a similar decrease in sales. Looking at it from a longer term perspective, the days sales in inventory rose to 75.3, the highest they have been in the post-bubble period. Given that the high operating leverage inherent in semiconductor production means each chip produced costs less than the prior, it is no surprise that gross margins were a record – that is what should happen when inventory is being built.

Not being that gullible, investors realize that the boost to this period’s margins will mean a drag on the period in which the inventory is actually corrected. And that, I believe, is why the stock is down after the report – not because guidance was “only in line.”

Disclosure: William Trent has a long position in SMH.

Topics: Semiconductors, Technology, Texas Instruments (TXN) | 6 Comments

The Week Ahead – 21 July 2007

The Economic Calendar is quiet in the early part of this week but there are important reports at the end of the week. On Thursday is the Durable Goods report, for which the consensus estimates a 2.0% increase. On Friday is the Preliminary Estimate of 2Q GDP, which the consensus has pegged at 3.2%. That sounds a little high to me based on the economic data table I’ve been compiling.

EconomicData

Bad and Deteriorating Bad but Improving Good but Deteriorating Good and Improving
Existing Homes (June) Chicago Fed NAI (May) Consumer Confidence (June) Real Disposable Income
Employment (June) Durable Goods (June) Personal Spending (June) ISM Manufacturing (July)
New Home Sales (June) Construction Spending Retail sales (August 2007) ISM Services (June)
ATA Truck Tonnage (June) CPI (July 07) Leading Indicators (June)  
GDP (Q2 Advance) Trade deficit (July 07)    
PPI (July 07) Durable Goods (July)    
Industrial Production (July 07)      
Housing Starts (July 07)      
       
       

The Earnings Calendar is as busy as it can get. Some of the names I’ll be watching:

Monday

Tuesday

  • CH Robinson (CHRW - Annual Report) – estimates have been rising and now stand at $0.47, but Landstar (LSTR - Annual Report) disappointed.
  • CDW Corporation (CDWC) – stellar monthly sales reports have kept estimates rising. They now stand at $0.97.
  • EMC Corporation (EMC - Annual Report) – The big news is still the VMWare IPO, but it is also a decent look at enterprise tech spend.
  • Laboratory Corporation of America (LH) – The Mid Cap and Large Cap Watch List (Track at Marketocracy) member has been seeing positive earnings revisions and is now expected to earn $1.09 on $1.03 billion in revenue.
  • Lexmark (LXK) preannounced and will probably offer poor guidance.
  • Linear Technology (LLTC) – expected to earn $0.35 on $267 million in sales.
  • Norsk Hydro (NHY) – The Large Cap Watch List (Track at Marketocracy) member has no analyst coverage right now.
  • Plantronics (PLT) – my covered call position is now being cashed out so I’ve no skin in this one. But it is often volatile.
  • United Parcel Services (UPS) is a great read on the health of the economy. Expectations are $1.03 on $12.23 billion in revenue.

Wednesday

Thursday

Disclosure: William Trent has a long position in SMH.

Topics: Air Courier, Altera (ALTR), Basic Materials, CDW Corp (CDWC), CH Robinson Worldwide (CHRW), Colgate Palmolive (CL), Communications Equipment, Computer Hardware, Computer Peripherals, Computer Storage Devices, Conglomerates, Consumer Non-cyclical, Corning (GLW), Durable Goods, EMC Corp. (EMC), Economy, Electronic Instruments and Controls, Federated Investors (FII), Financials, Freeport McMoRan (FCX), GDP, Graco (GGG), Healthcare, Healthcare Facilities, Hexcel (HXL), Ingram Micro (IM), Investment Services, Iron and Steel, Laboratory Corp. of America (LH), Large Cap Watch List, Lexmark (LXK), Linear Technology (LLTC), MEMC Electronic Materials (WFR), Metals and Mining, Mid Cap Watch List, Miscellaneous Capital Goods, Miscellaneous Transportation, Norsk Hydro (NHY), Personal and Household Products, Plantronics (PLT), Retail (Catalog and Mail Order), Semiconductors, Services, Small Cap Watch List, Steel Dynamics (STLD), Stock Market, Technology, Texas Instruments (TXN), Transportation, United Parcel Service (UPS), Watch List, Xerox (XRX), Xilinx (XLNX) | 3 Comments

TXN: Texas Instruments Guidance In Line With My Thinking

Bloomberg.com: Worldwide reports:

Texas Instruments Inc., (TXN - Annual Report) the world’s biggest maker of mobile-phone chips, said second-quarter sales and profit will miss its highest estimates as demand for handsets and calculators declines. The shares fell in extended trading.Sales will be $3.36 billion to $3.51 billion, the Dallas- based company said today in a statement. That compares with an April estimate of $3.32 billion to $3.6 billion. Profit will be 40 cents to 44 cents a share, excluding some costs, compared with an earlier forecast of 39 cents to 45 cents.

After signs from other companies that mobile-phone sales were picking up, analysts had expected Texas Instruments to predict higher revenue. The new report lowers the midpoint of Texas Instruments’ sales forecast to $3.44 billion, compared with an average estimate of $3.46 billion in a survey of analysts by Bloomberg.

Even at the top end of the sales forecast, Texas Instruments’ revenue will be 5.1 percent lower than in last year’s second quarter, when it was $3.7 billion. Profit also won’t top the 47 cents the company reported a year earlier.At a May 9 meeting with analysts, Chief Executive Officer Rich Templeton raised the company’s goals for gross margin to 55 percent from 50 percent and operating margin to 30 percent from 25 percent.

Even though its inventory (in days) has been expanding over the last year, Texas Instruments has produced fewer chips than it is expected to sell over the next couple of quarters, and production has been generally in line with sales recently. All in all, this probably supports the expected margin expansion. However, industry sales are weakening, so the “tightening” of sales guidance should also have been expected.

It doesn’t do anything to alter my new-found non-bearishness.

Topics: Stock Market, Texas Instruments (TXN) | No Comments

Five Reasons NOT to Buy Semiconductor Stocks Today

Lest you think we were going soft, we hereby balance our earlier enthusiasm for semi stocks with our more customary caution. The five reasons to avoid semiconductor stocks right now include:

  1. The fundamentals will get worse before they get better. While supply indications grew slower than demand in April, the turn followed 16 months of too much capacity being ordered. As that capacity comes on line, the inventory situation will worsen and margins will get hit more. It is not at all certain that estimates reflect this.
  2. It is May. Sure, sell in May and go away is a cliche. Things often become cliches for a reason.
  3. Demand? What demand?
  4. Valuations are too high because investors are hoping for more premium buyouts. They will happen, but not to every name in the sector.
  5. The last bear may no longer be standing.

Food for thought.

Disclosure: William Trent has a long position in SMH.

Topics: AGR, Advanced Micro Devices (AMD), Altera (ALTR), Analog Devices (ADI), Applied Materials (AMAT), Cadence Design Systems (CDNS), Cree (CREE), Elpida (ELPDF.PK), Freescale (FSL), Hynix Semiconductor (HXSCF.PK), Intel (INTC), Intersil (ISIL), KLA-Tencor (KLAC), LSI Corp. (LSI), Lam Research (LRCX), Lattice Semiconductor (LSCC), Linear Technology (LLTC), MEMC Electronic Materials (WFR), Marvell Technology (MRVL), Maxim Integrated Products (MXIM), MicroSemi (MSCC), Micron Technology (MU), NVIDIA (NVDA), National Semiconductor (NSM), ON Semiconductor (ONNN), PowerWave Technologies (PWAV), Qimonda (QI), STMicroelectronics (STM), Samsung Electronics (SSNLF.PK), Sandisk (SNDK), Semiconductor HOLDRS (SMH), Semiconductors, Silicon Laboratories (SLAB), Standard Microsystems (SMSC), Stock Market, Supertex (SUPX), Taiwan Semiconductor (TSM), Texas Instruments (TXN), United Microelectronics (UMC), Winbond Electronics (WBEMF.PK), Xilinx (XLNX) | No Comments

Five Reasons to Buy Semiconductor Stocks Today

A reader complained yesterday that we have been too negative. While we aren’t going to go crazy and have a whole positivity day, we will take the time to outline the bull case for the industry on which we have been most negative: semiconductors.

  1. The bad news is known. When we started harping about oversupply, it was the farthest thing from anyone’s mind. Like Heisenberg’s uncertainty principle, the act of observation can alter the experiment.
  2. The market is ignoring the fundamentals. Related to point 1, the market knows about the bad fundamentals and doesn’t care. Often this means that the bad news is sufficiently well known to be priced in. This is of course the weakest reason, as the market ignored the fundamentals in 2000 as well.
  3. Demand may be ready to pick up. Double-digit growth from a tech distributor for the first time in a long time should not be ignored. The Vista hoopla has passed, now the nuts and bolts work may be beginning.
  4. Supply and demand will soon realign. For the first time since 2005, orders for new equipment grew at a slower rate than semiconductor end demand. The longer this situation continues, the healthier it will be for future industry sales, pricing and profit margins.
  5. The game has changed. Forget private equity buyers. For the first time a semiconductor management team decided it was more important to take capital out of the industry than to add more. This is a sea change in semiconductor management-think, and the strong positive reaction from investors ensures that the wave will continue to build.

There. That wasn’t so hard, was it? Stay tuned for our five reasons NOT to buy semiconductor stocks today.

Disclosure: William Trent has a long position in SMH.

Topics: AGR, Advanced Micro Devices (AMD), Altera (ALTR), Analog Devices (ADI), Applied Materials (AMAT), Cadence Design Systems (CDNS), Cree (CREE), Elpida (ELPDF.PK), Freescale (FSL), Hynix Semiconductor (HXSCF.PK), Intel (INTC), Intersil (ISIL), KLA-Tencor (KLAC), LSI Corp. (LSI), Lam Research (LRCX), Lattice Semiconductor (LSCC), Linear Technology (LLTC), MEMC Electronic Materials (WFR), Marvell Technology (MRVL), Maxim Integrated Products (MXIM), MicroSemi (MSCC), Micron Technology (MU), NVIDIA (NVDA), National Semiconductor (NSM), ON Semiconductor (ONNN), PowerWave Technologies (PWAV), Qimonda (QI), STMicroelectronics (STM), Samsung Electronics (SSNLF.PK), Sandisk (SNDK), Semiconductor HOLDRS (SMH), Semiconductors, Silicon Laboratories (SLAB), Standard Microsystems (SMSC), Stock Market, Supertex (SUPX), Taiwan Semiconductor (TSM), Texas Instruments (TXN), United Microelectronics (UMC), Winbond Electronics (WBEMF.PK), Xilinx (XLNX) | 1 Comment

TXN: Equipment Order Push-outs Have Begun in Earnest at Texas Instruments

Despite generally strong orders for semiconductor equipment, we have maintained for some time that overcapacity building by the semiconductor manufacturers would ultimately result in order push-outs or cancellations. The order push-outs are one reason why some equipment makers never seem to be able to spot the downturn, even though experience should tell them otherwise.

Case in point: Texas Instruments (TXN - Annual Report). Even though bulls frequently argue that the long lead times necessary to build a semiconductor fab dictate the order cycle Texas Instruments offers a case study of order push-outs in action.
TI’s RFab not for sale – Semiconductor Fabtech

There has been much speculation over the future of Texas Instruments’ shuttered new 300mm fab in Richardson, Texas – dubbed RFab – since the chip manufacturer announced that it would stop internal manufacturing of digital CMOS devices in favour of foundry agreements.According to a story by Mark LePedus at EETimes, Kevin Ritchie, senior vice president of TI’s Technology and Manufacturing Group, said in an interview that KFab was not for sale, though the timing for first phase tool installation had been put back ‘a year-and-a-half.’

A brand new multi-billion dollar facility that just isn’t going to operate – for now. Perhaps TI will eventually use it, or perhaps they will sell it. In the meantime, however, don’t count those semiconductor equipment bookings until they are billed.

Disclosure: William Trent has a long position in SMH.

Topics: Applied Materials (AMAT), KLA-Tencor (KLAC), Lam Research (LRCX), MEMC Electronic Materials (WFR), Semiconductor HOLDRS (SMH), Semiconductors, Stock Market, Taiwan Semiconductor (TSM), Texas Instruments (TXN), United Microelectronics (UMC) | 4 Comments

Semi Cycle Ready to Turn?

According to data released today by the Semiconductor Industry Association:

Worldwide sales of semiconductors of $20.3 billion in March were 1.0 percent higher than the $20.1 billion reported for February, and 3.2 percent higher than the $19.7 billion reported for March 2006, the Semiconductor Industry Association (SIA) reported today. First-quarter global chip sales amounted to $61.0 billion, an increase of 3.2 percent from the $59.1 billion reported for the first quarter of 2006. Sales declined by 6.5 percent in the first quarter of 2007 compared to the $65.2 billion reported for the final quarter of 2006.

Looking at a chart of the year/year growth in semiconductor industry sales, it is clear that we are seeing a significant slowdown. In fact, we would be surprised if the sales do not decline this year.

semisales2.jpg
However, the industry has also slowed the pace of its orders for new semiconductor manufacturing equipment and for the first time since 2005 the growth in orders for new capacity was less than the growth in end demand. The longer this situation continues, the healthier it will be for future industry sales, pricing and profit margins.

semisupplydemand1.jpg

Disclosure: William Trent has a long position in SMH.

Topics: Applied Materials (AMAT), Intel (INTC), KLA-Tencor (KLAC), Lam Research (LRCX), MEMC Electronic Materials (WFR), Micron Technology (MU), National Semiconductor (NSM), Sandisk (SNDK), Semiconductor HOLDRS (SMH), Semiconductors, Stock Market, Taiwan Semiconductor (TSM), Texas Instruments (TXN) | No Comments

TXN: Market Excited About Texas Instruments Results, We’re Still Skeptical

When we previewed the earnings report for Texas Instruments (TXN - Annual Report) we said “March and June quarters have both had significant downward revisions. Will day of reckoning be forestalled?” Judging from the market’s reaction to the company’s earnings report, it appears that it has.

TI Reports 1Q07 Financial Results:

Texas Instruments Incorporated today reported revenue of $3.19 billion for the first quarter of 2007. Revenue declined 8 percent compared with the prior quarter and 4 percent compared with the year-ago quarter. Revenue was impacted by an inventory correction in the semiconductor market.Earnings per share (EPS) from continuing operations were $0.35, a decline of $0.10 from the prior quarter. The fourth quarter of 2006 included a benefit of $0.05 from the reinstatement of the federal research tax credit and a benefit of $0.01 from catch-up payments associated with new patent license agreements.

Consensus expectations called for $0.31 on $3.15 billion in revenue – which was exceeded on the top line but not the bottom after adjusting for the one-time benefits. However, guidance appears to be solid as well. The street was expecting $0.37 on $3.35 billion next quarter. The company’s guidance:

For the second quarter of 2007, TI expects revenue to be in the following ranges:

* Total TI, $3.32 billion to $3.60 billion;
* Semiconductor, $3.14 billion to $3.40 billion; and
* Education Technology, $180 million to $200 million.
TI expects earnings per share to be in the range of $0.39 to $0.45.

This time it looks like the mid-point of guidance is below current expectations, but the earnings per share are well above. The company reduced its guidance for research and development spending by $100 million. Since we think the semiconductor industry overall has been investing too much in growth initiatives that never materialize we don’t mind a modest (less than 5%) reduction in that plan. The company is also spending less on capital investment, a policy of which we approve:

Capital expenditures were $179 million. This was a decrease of $35 million from the prior quarter and a decrease of $229 million from the year- ago quarter due to lower expenditures for semiconductor manufacturing equipment.

However, we are not so sure about some of the positive comments from management.

“We believe the inventory correction that began in the second half of last year largely ended in the first quarter,” said Rich Templeton, TI president and CEO.

Inventory corrections don’t typically happen all in one quarter. And while TI’s inventory declined during the quarter, the days inventory on hand rose both sequentially and on a year/year basis. The sequential decline was because sales declined faster than inventories. The year/year growth was because inventories grew and sales declined. Those do not sound to us like indications that an inventory correction has run its course.

Cash flow from operations was $554 million. This was a decrease of $292 million from the prior quarter due to increased cash needed to meet working capital requirements, such as payment of profit sharing and bonus related to 2006 performance, as well as lower net income.

With a $43 billion enterprise value before the ebullient after-hours trading, Texas Instruments was valued at nearly 40x its trailing free cash flow. If the company is correct and the inventory correction is over, the shares appear richly valued. If we are correct and the inventory correction has farther to go, the shares appear exorbitantly priced.

Disclosure: William Trent has a long position in SMH.

Topics: Stock Market, Texas Instruments (TXN) | 1 Comment