Is There Any Upside Left for Texas Instruments Incorporated (TXN) and Analog Devices, Inc. (ADI)?

While semiconductors offer a great way to diversify in technology, they are suffering from a plethora of problems right now. From market deceleration to inventory disruptions, investors should be focused on the downside, and yet the market has given several firms a premium multiple to the S&P 500. Is this warranted?

Texas Instruments logoWhat Texas Instruments Incorporated (NASDAQ:TXN) Is Doing to Create Value

Texas Instruments is the third largest producer of semiconductors in the world and has had several acquisitions since it was founded. The decision over a year ago to acquire National Semiconductor for $6.5 billion made the company the leading producer of analog technology in the world. Today, TI has profit margins of 13.5%, revenues worth $13.3 billion, and a 15.7% return on equity. Just a few days ago, the company announced a quarterly dividend of $0.21 per share to be payable on Feb. 11.

Management is taking several steps to continue to create value. In late 2012, TI unveiled low energy Bluetooth that had over-the-air download capabilities. The device targets the swelling market of Bluetooth usage. TI is also constantly coming up with new technologies to improve its existing product portfolio, and this is evident by the company's recent introduction of the lowest power converter. The device is able to increase power by up to 70%. The gadget targets systems and devices that use micro circuits, such as smoke detectors and mobile accessories.

In the fourth quarter, TI beat analyst estimates. However, disconcertingly, it guided for EPS between $0.24 and $0.32 in 1Q13--below the $0.34 consensus estimate. Revenue guidance of $2.69 billion - $2.91 billion is also skewed more towards being below the $2.89 billion consensus estimate. According to the CEO, the company is operating in a poor demand environment, and the firm suffers from poor visibility into the future given a reluctance for customers to "commit to extended backlog." In the meanwhile, low inventories are being seen in China, Europe, and the United States.

Analog Devices, Inc. (NASDAQ:ADI)

Analog Devices is giant semiconductor producer that focuses on data conversion as well as signal conditioning. The company competes with other semiconductor makers such as Texas Instruments and Linear Technology Corporation (NASDAQ:LLTC). The company has been using strategic acquisitions and diversification to spread out exposure and reduce risk.

The company recently reported its fourth quarter earnings and registered a 2% increase in revenues to $695 million and a 4% increase in EPS. However for the fiscal year, the company had a 9.8% decline in revenues to $2.7 billion and attributed the erosion to global economic difficulties. Cash flow amounted to $815 million while share repurchases and dividends amounted to $505 million.

Going forward, the company expects 1Q13 to experience a 6% to 12% decline in revenues and EPS of $0.40 to $0.48. The sales drop off was well below the 2% consensus estimate on the Street and is a result of wild inventory adjustments, an issue that has been ongoing for some time now. Management has slashed production, which has, in turn, narrowed margins by 180 bps sequentially.

In mid-September 2012, RBC downgraded the chip industry from "Overweight" to "Market Weight" as a result of poor investors, a softening Chinese market, and poor demand in telecom and PCs.

At least we can see that matters aren't going as badly for Analog Devices as they are for Maxim Integrated Products Inc. (NASDAQ:MXIM) . Maxim is actually up 21.6% for the year, but this rally could reverse from recent data that evidenced "a significant deceleration" in mobile phones, which makes up a little more than a third of Maxim's sales. At 27x past earnings and near the 52-week high, the stock looks a bit expensive at this point. Analog Devices is also near its 52-week high but trades at a much more reasonable 20.6x past earnings with considerable liquidity, as indicated by the 8.4x quick ratio.

Conclusion

There is tremendous uncertainty amongst semiconductors and the companies they supply right now. While I believe the companies highlighted herein will see an operational turnaround from a recovering economy, I also believe much of the upside has been factored into the stock prices. TI, Analog Devices, and Maxim are all trading above 20x and are coming off of weak growth. I recommend avoiding the stock for better value investments.

The article Is There Any Upside Left for These Semiconductor Stocks? originally appeared on Fool.com and is written by David Gould.

Copyright © 1995 - 2013 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.

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