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Texas Instruments: Buy when the chips are down
Despite brilliant long-term prospects, TI remains moderately priced because of current softness in sales.
By Michael Sivy, Money Magazine editor-at-large

NEW YORK (Money) -- Texas Instruments is a leading semiconductor producer and the biggest maker of chips for cellphones and certain other popular types of consumer electronics.

The chip sectors that the company dominates are among the best niches in the industry, and TI has some of the most advanced products.

Most analysts foresee far-above-average growth for the company over the long term. Compound earnings growth is projected as high as 18 percent annually over the next five years.

Nonetheless, TI's share price has remained between $30 and $35 for most of the past two years. At present, the stock trades at only a small premium over the broad market multiple, despite a projected growth rate that is far above that of the average blue chip.

TI's announcement of third-quarter results on Monday simply confirmed analysts' assessment of the company.

Earnings per share from continuing operations rose 25 percent from a year earlier, exactly in line with expectations.

Gross profit margins improved, rising to 51.4 percent, up from 50.6 percent a year ago.

Perhaps most important, the company continues to benefit as older types of cellphones are replaced with models that use TI's sophisticated technology.

Given those facts, you'd expect the stock to be trading at a price/earnings ratio in the low 20s, instead of less than 17 times estimated earnings for 2007.

The reason for the modest P/E is simple: TI faces near-term softness in revenues. Sales for the most recent quarter were up 13 percent from a year ago but only 2 percent from the previous quarter.

Moreover, CEO Rich Templeton has cautioned that sales growth in the fourth quarter will be below normal for the season.

Orders are down slightly from year-ago levels. As a result, inventories have risen to 73 days worth, compared with 67 days in the second quarter and 59 days a year ago.

Templeton explains that customers have replenished their own inventories and are trying to operate with lower backlogs.

He also notes that current trends in cellphone sales are leaning toward cheaper models.

Although it's always hard to figure out precisely when to buy in a situation like this, it does seem that Texas Instruments (Charts) is a compelling choice for investors looking for growth at a reasonable price.

If fundamental growth prospects are good, inventory bubbles typically get worked off within a year.

TI has ample cash flow and virtually no long-term debt. The company also has more than $4 billion on hand - and that's after spending $5 billion to repurchase stock over the past four quarters.

Realistically, you have to recognize that the company's fourth-quarter results will be soft. Moreover, they could come in below what investors currently expect, or the weakness could continue into the first half of next year.

But if you're truly a long-term investor, TI does appear to offer a compelling opportunity. It's the leading company in the most attractive parts of an industry with well-above-average growth prospects. In addition, both margins and finances are strong.

In a situation like this, the best strategy is to buy the stock and not look at it for a year. You're almost certain to be at least slightly off on the timing. But when the year is up, you'll probably be pleasantly surprised.


More techs in the Sivy 70: Cisco (Charts), Dell (Charts), Intel (Charts) and Microsoft (Charts)

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