Texas Instruments (TXN): A 'bad news' buy

"Wall Street has recently been very negative about Texas Instruments (NYSE: TXN)," notes wireless sector expert Nikhil Hutheesing.

In his Forbes Wireless Stock Watch the advisor explains, "But things may not be as dire as they sound and I think that with expectations down, the company will end up exceeding expectations in the second half of this year."

"One reason Wall Street has been negiative is that TXN's biggest wireless customer, Nokia, announced a fundamental shift, stating it would no longer depend mostly on Texas Instruments for its chips. Ericsson also said it had shifted to a multi-supplier strategy.

"Besides that, in April, at TXN's earnings conference, CEO Rich Templeton talked of a cloudy economy and said that his company had become become more conservative with its outlook for the second quarter.

"Meanwhile, I've spoken with a number of experts in the wireless area who tell me that orders for TI's chips are significantly higher for the second half of this year than they have been in previous years. These orders are even coming from Nokia. (So far, Nokia's muti-supplier strategy has not had an impact on Texas Instruments.)

"In addition, Nokia says that there is increasing demand for its single-chip plan (which puts more processing power onto one chip rather than many chips.) This is good news for TXN which is supplying Nokia with GSM single chips for its mobile handsets.

"Nokia also has new products coming up and it has depleted inventories of its chips—as have some other handset vendors. That is good news as well because it means that there will be renewed demand for mobile chips.

"Wireless will continue to contribute about 30% of revenues and TI's OMAP (Open Multimedia Application Platform) processors, which are used in mobile phones to enable multimedia applications, is growing, representing about 8% of revenues.

"In fact, as wireless carriers continue to upgrade, from 3G to 4G and beyond, the demand for these kinds of multimedia chips and other TI application processors will only increase.

"Unlike the baseband business for wireless phones, the application processors are far more complex requiring hardware and software expertise. As a result, the barriers for entry, here, are higher than in the baseband business, where chips act as modems allowing a call to be made.

"So while Wall Street worries about TI's business, I think the company will show strength in the second half of this year.

"Another engine of growth these days is coming from its analog chips. Analog chips are used to translate sound and temperature into digital signals that can be understood by computers. So even though 'analog' is analogous to 'old' when it comes to buying a flat screen TV, it's critical technology for our digital future.

"Shares of TXN are trading near all time lows. I think the bad news has already been reflected in the shares and that current weakness in the stock provides a buying opportunity.

"In the first quarter, profit rose 28% to $1.76 billion. That met analyst expectations and was up $119 million from the first quarter of 2007. Revenues were up 2.5% from one year ago to $3.2 billion. TXN trades at 16.1 times estimated 2008 earnings per share of $1.97.

"I am conservatively valuing TXN at 5 times 2009 EV/Sales, which suggests a price target of $52 per share. We already own shares of TXN in our core wireless model portfolio and I am going to continue holding them. For those who have not invested in TXN, now is a good time."