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Can Texas Instruments end tech's blues?
Leading maker of chips for cell phones reports better than expected 1Q earnings, boosts guidance.
April 18, 2005: 6:51 PM EDT
By Paul R. La Monica, CNN/Money senior writer
Texas Two-Step: Shares of TI haven't been hit as hard as other companies in the Philadelphia Semiconductor Index this year.
Texas Two-Step: Shares of TI haven't been hit as hard as other companies in the Philadelphia Semiconductor Index this year.

NEW YORK (CNN/Money) - Texas Instruments, a leading maker of chips used in cell phones, reported a first quarter profit that was a penny better than estimates and raised earnings guidance for the second quarter, news that may give beleaguered tech investors a reason to breathe a sigh of relief.

After last week's stunning earnings miss from tech conglomerate IBM (Research), investors dumped many tech stocks, including semiconductor manufacturers, on fears of an impending slowdown in global corporate demand for tech products and services.

TI's sales did come in a touch below analysts' estimates but in a written statement, TI's president and chief executive officer Richard Templeton said that "the market environment is improving."

As such, TI said it now expects earnings for the second quarter to be between 25 cents a share and 29 cents a share. The midpoint of 27 cents a share is one penny ahead of the current consensus of 26 cents a share, according to Thomson/First Call.

TI added that it expects sales to be in a range of $3 billion to $3.24 billion. The $3.12 billion average is slightly below Wall Street's estimates of $3.17 billion. But investors seemed to focus more on the fact that the high end of the range is above the consensus estimate.

Shares of TI (Research) surged more than 6 percent after hours, according to INET, after rising less than 1 percent in regular trading on the New York Stock Exchange.

"Considering the negative sentiment that has come into the market and the chip sector in particular, this is relatively good news," said William Conroy, an analyst with Sanders Morris Harris. "The guidance isn't bad. There were expectations that it could be worse."

But the big question facing investors now is whether the reassuring news from TI will be enough to spark a rally in other chip stocks and the tech sector at large. Although the Nasdaq did inch slightly higher Monday it is still down more than 4 percent in the past week and 12 percent for the year.

Intel (Research), the world's largest semiconductor company, will report earnings after the closing bell Tuesday, and investors will be looking for it to report decent results and guidance as well, said Cody Acree, an analyst with Legg Mason.

"We're going to need to see follow-through from Intel. Good news from Intel could set a tone and start to give those that were most fearful about the outlook for chip stocks less reason to be concerned," said Acree.

For example, investors will hope to see further improvement in inventory conditions from Intel and other semiconductor companies. An aggressive build up of chips during the middle of last year plagued many semiconductor makers as a temporary slowdown in demand for PCs, cell phones and other tech gadgets in the second half caused worries about an inventory glut.

Several chip companies have reported progress in working down their inventories in the past few months and TI confirmed Monday that it too was doing a better job of managing its supply of chips. The company said that inventories fell slightly in the fourth quarter, following a $100 million reduction a quarter earlier.

And during a conference call with analysts, TI's chief financial officer Kevin March said that orders for new chips picked up in March after a relatively weak February and that orders were strong so far in April. That's a contrast to what IBM reported last week. Big Blue said that it saw demand for tech products and services fall off in March following a strong January and February.

Acree said that TI's earnings should help erase some doubts about the health of the chip sector. He said that a few months ago, there were several negatives, including rich valuations, analyst estimates that were too high, bloated inventories and low end demand for products using chips.

Now, he said inventories are coming down and demand is improving. In addition, he thinks estimates are reasonable for TI and other chip companies and that TI's stock, trading at about 21 times 2005 profit projections, is attractive.

Still, investors seemed to be a bit skeptical about whether TI's good news was an encouraging sign for the rest of the sector. Other chip stocks moved higher on Monday following TI's news but their gains were muted. Intel rose about 1 percent, as did shares of TI competitors Broadcom (Research) and Qualcomm (Research).

Nokia (Research), the world's largest cell phone manufacturer and a top TI customer, was up about 1 percent in after-hours trading and Motorola (Research), the number 2 maker of cell phones, gained about 0.6 percent.

For a look at more chip stocks, click here.

For more earnings news, click here.

Sanders Morris Harris' Conroy owns shares of TI but his firm has no banking relationships with the company. Legg Mason's Acree does not own the stock and his firm has no investment banking ties to the company.  Top of page

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