Two key points are becoming clear from the latest quarterly results season. Firstly, the banking system won’t be fixed anytime soon, so many more debt-laden businesses will go to the wall. Secondly, the destocking process that has strangled much of the world’s output over the past six months has largely run its course. That means there are now good opportunities offered by those companies who have plenty of funds and can take advantage as inventories are replenished.
Texas Instruments (NYSE:TXN), tipped as a BUY by Argus
One is Texas Instruments (TI), a leading developer of microchips for mobile phones, consumer goods, cars and medical equipment. It is jam-packed with great technology, owning more than 36,000 registered patents. Its products (such as power management and data storage) are used in around half of all cell phones and 75% of notebook PCs sold globally. What’s more, it continues to invest heavily in research and development to stay ahead of its rivals, and is focusing on premium gadgets. The firm has shifted away from low-margin entry-level handsets into more profitable 3G mobile devices, along with beefing up its state-of-the-art analogue (39% of sales) and embedded processor (13%) divisions.
The strategy seems to be working. While numbers for the first quarter of 2009 were weak, the group still beat Wall Street’s expectations of a loss. This was due to robust volumes in Asia, tighter cost control and improving demand from laptops and handsets. The board also said the “worst of the inventory drain had finished”. After “troughing in December, orders had steadily climbed back each month from January through March”. Analysts expect 2009 sales and adjusted earnings per share (EPS) of $8.7bn and $0.46, rising to $9.1bn and $0.90 in 2010, putting the stock on seemingly expensive p/e ratios of 40 and 20.
But this is where you must look through the near-term mire, and value the firm on its long-term fundamentals. I reckon Texas Instruments can deliver normalised operating profit (EBITA) of around $3bn a year. Assuming a ten-times multiple and after adjusting for its net funds of $2.4bn, this gives a value of nearly $22 a share.
Of course, there are risks. Given the poor macro environment and weak consumer outlook, it may be some time before the group begins to fire on all cylinders again. Secondly, Nokia’s move towards a multi-vendor procurement strategy could affect Texas instruments’ position in the account, while improving the prospects of rivals such as Infineon. Lastly, the firm faces a variety of challenges, including rapidly changing technology, pricing pressure and a $600m pension deficit. But with its top-notch products and rock-solid balance sheet, this tech giant looks well placed to benefit from growth in mobile communications and cloud computing.
Recommendation: long-term BUY at $17.50
• Paul Hill also writes a weekly share-tipping newsletter, Precision Guided Investments