Why You Should Avoid TI, Buy These Riskier Stocks Instead
By David Gould - January 24, 2013 | Tickers: STX, TXN, WDC | 0 Comments
David is a member of The Motley Fool Blog Network -- entries represent the personal opinions of our bloggers and are not formally edited.
One of the most basic principles of financial theory is that riskier assets outperform--and this makes sense. The market originally assigns higher discount rates to uncertain future earnings distributions; but, when the fundamentals deliver, it starts lowering those discount rates to increase shareholder value. In this article, I review why you should buy two beaten down semiconductor companies over a much stabler peer.
Texas Instruments (NASDAQ:TXN): Why Investors Are Sitting on the Sidelines
Texas Instruments, commonly abbreviated "TI," is a supplier of semiconductors and analog devices. It is the third largest semiconductor company, while it leads globally in analog technology. The company has a large market share with quite a strong balance sheet. Its revenue breakdown indicated that it had $6.375 billion from its analog segment, $2.11 billion from its embedded segment, $2.518 billion from the wireless segment and some $2.732 billion from other segments. Total revenue stands at $13.735 billion.
Management also remains committed to returning free cash flow to shareholders, as evidenced by the annual dividend growth rate of 30%. TI has had a cash flow of $7 billion between 2009 and 2011 and has repurchased shares worth $5.4 billion. The share repurchase has resulted in a reduction in the number of shares from 1.77 billion to 1.15 billion. Within the same time frame, TI paid $1.8 billion worth of dividends It is more than sustainable, since the payout ratio stands at just 43.9%.
Despite this shareholder-friendly capital allocation policy, TI does have some pitfalls to watch out for. A good example is the competition that the wireless segment has faced recently. Though the effect was not severely felt because of the good performance in other segments, the wireless segment still faces a challenge. This calls for development of new products and increased research and development. TI’s response to changes in the market has been slow, and this has led to abandoning the production of mobile chips. Combined with the unstable world economy, investors are rightfully sitting on the sidelines.
Our dopey foolish friend doesn't seem to understand that TXN didn't abandon the wireless segment due to the cost of investment, but rather because additional investment in the analog/mixed signal segment would produce more growth at a higher GPM. (see the Nat Semi acquisition)