Texas Instruments (NASDAQ:TXN) has witnessed an increased valuation over the past few months despite weakness in its end markets. The stock is already trading at a high valuation, close to its 52-week high. Texas Instruments shares have gained robustly even after a feeble outlook issued by the company the last time it reported earnings. The company reported a book-to-bill ratio below 1 in the last-reported third quarter that signifies weak order patterns.
The seasonal declines in orders were cited as the reason behind the weak outlook by management. Further, it seems like customers utilized the existing inventory built up earlier in the year, further weakening the condition for Texas Instruments. Therefore, under these tough conditions, investors must be thinking whether to hold on to Texas Instruments or not, taking into consideration yet another feeble outlook later this month could decline the condition further.
A look at demand
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- TXN 15-Year Financial Data
- The intrinsic value of TXN
- Peter Lynch Chart of TXN
There might be some good news in store for Texas Instruments investors with a good portion of the revenue estimated to come from the industrial and the automotive end markets.
KPMG's annual global semiconductor industry outlook illustrates that semiconductor industry executives are positive on robust demand in 2014. KPMG has marked 57 as the confidence index of the industry and the firm believes to be scoring above 50 as a positive sign.
Additionally, according to Semiconductor Intelligence, the growth is expected to accelerate in 2014, driven by the increase in global GDP. The semiconductor market is forecasted to grow as much as 15% this year according to the research firm, based on the International Monetary Fund’s GDP growth forecast. At present, Texas Instruments is believed to be a bellwether in the semiconductor industry as its chips are used across a variety of applications. Thereby, investors can remain positive regarding the company’s future with the progressing year including the demand in key areas such as automotive and industrial.
For instance, new vehicle sales in the U.S. are expected to touch their highest levels this year since 2006. As per Edmunds.com, sales are believed to touch 16.4 million vehicles in 2014, an increase from 15.6 million last year.
In addition, the U.S. industrial outlook for 2014 and 2015 is bright. Manufacturing production is seen to be increasing 3.1% this year, better than the 2.1% growth witnessed a year ago. High-tech production (computers and electronic products) is estimated to be up 6.8%, whereas traditional manufacturing is seen to improve 3%, better than previous year’s growth rates of 4.4% and 2%, respectively.
The peers in the industrial market also witnessed positive cues. For example, Atmel experienced growth in the industrial market and is quite positive about prospects going forward. There’s strong adoption for Atmel’s touchscreen controllers in the industrial and automotive markets. The Japanese company Kyocera selected Atmel’s maXTouch controller for a medical device and the company has witnessed design wins at the three largest auto makers in North America and Europe.
What about valuation
Considering these projections, investors are advised to hold on to Texas Instruments for the time being and look for an opportunity like that of the company offering an optimistic outlook for the current fiscal year. However, there might be confusion that the stock is already trading at a fairly-valued level of 25.6 times earnings, so what about the future growth. However, taking into account the forward P/E of 20 indicates that earnings growth is expected going forward.
In addition, while comparing Texas Instruments to industry peer Analog Devices, which trades at a P/E of 23.2, the former doesn’t appear all that expensive. Analog Devices is also witnessing weakness in the end markets, resulting in a feeble outlook for the current quarter.
It is not a wise idea to sell chip makers such as Texas Instruments and Analog Devices right away while considering the long-term opportunity present in the semiconductor industry. Further, Texas Instruments seems impressive with an outstanding dividend yield of 2.70% and promisingly returns cash to shareholders. For instance, the company returned $1 billion through dividends and stock repurchases during the third quarter. Therefore, although Texas Instruments’ outlook was looking very feeble last time, still there are some solid reasons to hold on to the stock as mentioned above.