Texas Instruments (NASDAQ:TXN) has experienced healthy growth over the past few months even after weakness in its end markets. The stock is already trading close to its 52-week high and at stretched valuations, similar to its semiconductor peers such as Analog Devices (ADI) and Atmel (NASDAQ:ATML).
Not a good scenario
Texas Instruments shares have gained despite a poor outlook issued by the company the last time it reported earnings, which is quite surprising. The company’s book-to-bill ratio below 1 in the last-reported quarter indicates weak order patterns.
Seasonality is considered as the primary reason behind the declining orders and the weak outlook. In addition, customers used the existing inventory built up by them earlier in the year, leading to further weakness for Texas Instruments. These circumstances put investors in a dilemma whether to hold on to Texas Instruments or not, especially considering that a weak outlook could spell trouble.
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- TXN 15-Year Financial Data
- The intrinsic value of TXN
- Peter Lynch Chart of TXN
Better times ahead
KPMG forecasts a positive outlook for the annual global semiconductor industry in 2014. The confidence index of the industry is at 57 and a reading above 50 is considered as a positive sign. The company officials are cautiously optimistic about the trends in the industry this year, but sub-sectors such as medical devices, industrial machinery, automotive, etc. are expected to perform well.
Going forward, the semiconductor industry’s growth is expected to accelerate in 2014, pushed by an increase in global GDP as reported by Semiconductor Intelligence. The semiconductor market will grow as much as 15% this year, on the basis of the International Monetary Fund’s GDP growth forecast. Texas Instruments is well-known in the semiconductor industry as its chips are used across a variety of applications. Hence, investors can expect the company to gradually gain momentum as the year progresses and demand in key areas such as automotive and industrial improves.
Additionally, the U.S. industrial outlook for 2014 and 2015 is looking good with manufacturing production expected to increase 3.1% this year, better than the 2.1% growth seen last year as reported by Manufacturers Alliance for Productivity and Innovation (MAPI). High-tech production (computers and electronic products) is expected to increase 6.8%, while traditional manufacturing is projected to improve 3%, better than last year’s growth rates of 4.4% and 2%, respectively.
A look at peers
Its peers like Atmel are witnessing growth in the industrial market. Atmel is seeing robust adoption of its touchscreen controllers in the industrial and automotive markets. Atmel’s maXTouch controller chosen by Japanese company Kyocera for a medical device has landed design wins at the three largest auto makers in North America and Europe.
Given these projections, investors must hold on to Texas Instruments for the time being and look for company offering an optimistic outlook for the current fiscal year. Although, the stock is trading at a fairly-valued level at 25.6 times earnings. But then, a forward P/E of 20 indicates healthy earnings growth in future.
So, straight away selling Texas Instruments might not be a good idea considering the long-term opportunity present in the semiconductor industry. Moreover, Texas Instruments has an impressive dividend yield of 2.70% that allows it to aggressively return cash to shareholders. For instance, the company returned $1 billion through dividends and stock repurchases in the third quarter. Hence, although Texas Instruments’ outlook was not very strong the last time, still there are some solid reasons already discussed to hold on to the stock.