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FOOL PLATE SPECIAL: An Investment Opinion
Texas Instruments' Solid State

Texas Instruments reports no surprises in its second quarter, with results slightly above expectations. However, that is only to be expected given the continuing semiconductor cycle upswing. The real issue for investors now becomes the firm's valuation, not its ability to beat future estimates.

By Brian Graney (TMF Panic)
July 25, 2000

Continuing the July second-quarter earnings hit parade, analog and digital signal processor juggernaut and NOW 50 component Texas Instruments (NYSE: TXN) turned in its results for the most recent period last night. On the whole, there were no real surprises for investors to contend with. That was not too surprising considering the still-strong demand conditions prevailing in chip-land these days, with further incremental evidence of that fact coming last week from such well-known players as Intel (Nasdaq: INTC) and AMD (NYSE: AMD).

A solid, if not surprising, Q2 performance
Blasting through the numbers for the period, pro forma EPS of $0.31 was up 35% from a year ago and a penny ahead of the First Call mean estimate. Excluded from the EPS figure was a $1.2 billion gain from the sale of Micron Technologies (NYSE: MU) common stock and $25 million in goodwill and merger-related intangibles amortization. Not to single out TI or anything, but the firm's habitual exclusion of goodwill has prompted some analysts to replace the usual EPS abbreviation with the updated EBG. Ostensibly, that is short for "earnings before goodwill." But to the cynical investor who takes issue with the popular boardroom game of excluding/including this, that, or the other accounting item from the bottom line, it could just as easily stand for "everyone's best guess."

While there were some rumblings from analysts about the overall quality of the firm's earnings growth this quarter, TI's topline growth and margin performance were inarguably solid. Total revenues advanced 23% year-over-year to $2.8 billion, while sales at the semiconductor division rose 28% and DSP revenue leapt 40%.

Even excluding a onetime royalty gain that helped last year's sales results, the year-on-year growth rates were all slightly lower than those reported in Q1. But on the other hand, the company's gross margin held steady sequentially at 49.5%. In the final analysis, the second-quarter performance and the accompanying favorable outlook provided by management was enough to spur ratings reiterations and upward fiscal 2000 earnings estimate revisions from close to a half-dozen sell-side analysts today.

Growth, but at what price?
However, investors should probably not be concerned with the quarterly earnings growth nitty-gritty at this point in the game. That mostly boils down to basic blocking and tackling during a sector upswing. Barring a major screwup execution-wise from management down the road, TI looks like a sure bet to continue benefiting from the general semiconductor industry upturn and reporting earnings and sales gains in the coming quarters.

The major issue confronting TI investors today is the firm's market valuation, which has come down some 20% in recent weeks but is still up by nearly 40% year-to-date. With that in mind, determining how much of that near-term growth is already reflected in the firm's share price at this level should be the Foolish investor's next move.

Your Turn:
Can investors expect Texas Instruments' stock price to keep rising from here? Post your thoughts on the firm's discussion board.

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