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.

Biotech Insider Alert - $6 Stock To Hit $40

$200 Million Dollar Healthcare Hedge Fund's #1 Best Idea Right Now

The best healthcare hedge fund out there right now is one of the largest shareholders in this biotech stock. The fund returned more than 20% in each of the last 2 years with a virtually fully hedged portfolio, and it's sending out a BUY signal on this biotech stock. Get your FREE REPORT today (retail value of $300)

This is a FREE report from Insider Monkey. Credit Card is NOT required.
Comments
Insider Monkey Small Cap Strategy
Insider Monkey Small Cap Strategy

Insider Monkey beat the market by 52 percentage points in 24 months. Our beta is only 1.2 (don't click this link if beating the market isn't important to you).

Lists

Best Selling Comic Books of All Time

A-list Actors who Sabotaged Their Career

Rappers With a College Degree

The Best Jazz Albums of all Time

The Most Influential Jazz Musicians

The World’s Most Famous Photographers

The Best Oscar-Winning Songs

Most Influential Choreographers Ever

Most Expensive Department Stores in the World

The Most Expensive Stolen Paintings in the World

The World’s Most Expensive Teas

Top Oscar Record Holders

The Most Expensive Flowers in the World

Countries With a Booming Film Industry

Most Expensive Cupcakes in the World

Uncommon European Escapes

The Most Stolen Artists in History

Best Travel Destinations in Australia

World’s Most Expensive Musical Instruments

World’s Most Famous Animals

Most Expensive Cakes in the World

Most Expensive Kosher Champagne in the World

Most Expensive Kosher Wine in the World

The Most Surprisingly Dark Fairy Tales

Most Popular Travel Destinations in Asia

The 10 Most Expensive Dresses Ever Worn to the Oscars

World’s Most Visited Art Museums

Best Countries for Photographers to Work in

Best Paid Jobs in the Film Industry

The Most Renowned Recovered Paintings Ever

Child Stars That Turned out Just Fine

Books That Were Banned in the Past Century

World’s Richest Dancers

Best Remedies against Bad Breath

Foods That Improve Your Skin Texture

Best-Selling Children’s Books of all Time

Foods That Boost Your Libido

Best-Selling Books of all Time

The Most Expensive Academy Awards Jewelry in History

Most Expensive Japanese Restaurant In New York City

The Best B-Boy Movies

Most Awesome Hip Hop Documentaries

Foods That Stain Your Teeth

Richest Doctors in the World

The Best Movie Sountracks Ever

The Highest Grossing Musicals on Broadway

The Most Successful Reality TV Stars

Cheapest Cities to Visit in the US

Most Expensive Summer Camps

Most Expensive Animals in the World

Subscribe

Enter your email:

Delivered by FeedBurner

X

Thanks! An email with instructions is sent to !

Your email already exists in our database. Click here to go to your subscriptions

Insider Monkey returned 129% in 2.5 years!! Wondering How?

Download a complete edition of our newsletter for free!