Texas Instruments
Bull's Pen
by Paul Larson ([email protected])
The Texas Instruments you knew yesterday is not the Texas Instruments you will see tomorrow. Sure, the company still makes calculators, but TI has just finished going through a massive metamorphosis that has transformed it from a widely dispersed technology conglomerate to a company focused on a hot sector that it currently leads -- Digital Signal Processors. This new focus has not only dramatically changed the operating environment at the company; it will allow TI to maintain and build upon the lead in this important portion of the semiconductor industry.
You may be wondering what the heck Digital Signal Processors (DSPs) do since you can't exactly run out to the supermarket and pick up a half dozen of them. DSPs are a special breed of electronic processors that crunch data up to ten-times faster than traditional microprocessors. Their counterparts, mixed-signal/analog products, essentially translate analog signals (sound, light, heat, magnetic differences, etc.) to digital signals for processing and transmission. In other words, if you are a signal going from "real world" to the digital realm (or vice versa), you need a DSP and related equipment to translate for you. They are a crucial component in every modem, hard drive, CD player and digital cellular phone, among numerous other uses.
You still may not know exactly what a DSP is, but chances are you've used one recently. Spoken on a cellular phone? TI components are in over half of all digital cell phones. Most of you are right this moment using a TI DSP and probably didn't even know it. You're using a computer to read this, right? TI semiconductors are in over 90% of all high-capacity disk drives. Furthermore, at the heart of one in three high-speed modems are DSPs supplied by Texas Instruments. Needless to say, DSPs are extremely pervasive in today's society, and their use looks to continue to grow at an impressive clip for the foreseeable future.
Don't take my word for it that there is growth in this sector; let's look to the numbers. The demand for DSPs have increased at a 30% annual clip over the past ten years, making DSPs the fastest growing segment of the semiconductor market. Look to the future and the DSP market is, according to Forward Concepts, expected to grow from roughly a $4 billion industry in 1998 to $13 billion in 2002. Texas Instruments leads this market, and there is no need to break out my brand new TI-83 Statistical Calculator (with financial functions) to see that the company is sure to benefit handsomely from this growing pie.
Another of the hot uses for TI products is the upcoming xDSL technology that will allow computer downloads from the Internet over ordinary telephone lines at speeds up to 100-times faster than what is currently available. TI was already a leader in DSP technology, but the company's recent acquisition of xDSL trailblazer Amati certainly cemented its position as the premier player in communications and networking components. If xDSL takes off like many expect it just might, it will be an absolute windfall for Texas Instruments.
Getting Texas Instruments to the point it is at today, focused on DSPs, has not been easy, and part of that change has seen the company selling off vast portions of its empire. The most notable sales were of TI's defense electronics business to Raytheon <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: RTN.B)") else Response.Write("(NYSE: RTN.B)") end if %> as well as its DRAM memory business to Micron <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: MU)") else Response.Write("(NYSE: MU)") end if %>. Ridding itself of those lower-margin businesses has not only concentrated Texas Instruments in its brightest sector, but the reorganization should dramatically improve the company's income statements in rather short order.
In fact, part of this recovery from the cyclical lows of its old businesses can already be seen. In the third quarter, the company reported earnings of $.41 per share versus a mean estimate on the street of $.28 per share. Semiconductor orders grew 8% sequentially, and the company's gross and operating margins are starting to rebound.
Look to the future and analysts are expecting the company to earn $2.88 in 1999, which is nearly triple what the company is on-track to earn when 1998's books are closed. At today's prices that puts the stock at 31x forward earnings, which, believe it or not, is darn close to an average multiple of profits in this market. Then look to the long-term profit growth of over 20% expected over the next 5 years and the price tag does not seem very frothy at all.
Of course, if xDSL takes off, or if analysts are underestimating the operational efficiencies the "new" TI will achieve down the road, chances are those forward estimates will be due for some upward revisions. And if that happens, shareholders will certainly need a TI calculator to tally their profits.