Is Texas Instruments a Good Stock to Buy?

Texas Instruments Incorporated (NASDAQ:TXN) joined the NASDAQ 100 index earlier this year, but the stock isn’t seeing much of a boost: at the time it was trading up from the beginning of 2012, but it is currently down 7% year to date while the index itself is up about 20%. Texas Instruments designs semiconductors and produces analog products, processors, and- yes- calculators.

Texas Instruments Incorporated (NASDAQ:TXN)

The fall in the stock price has come alongside a decline in Texas Instruments’ business; in the second quarter of 2012, revenue was down 4% compared to the second quarter of 2011. Expenses were a bit higher, though most of the higher costs came from R&D and from acquisition expenses. Seeing higher R&D expenses isn’t quite a problem for a tech-oriented company, and the acquisition expenses are likely to be non-recurring. In the first half of the year, gross profits were down 9% and higher fixed expenses brought net income down even further. On a segment basis, the analog-related business was down slightly in terms of operating income, with the embedded processing and wireless segments seeing larger declines both in absolute and (as they are smaller contributors to the company) relative terms.

At a market capitalization of about $31 billion, Texas Instruments Incorporated trades at 20 times trailing earnings. Even ignoring R&D and acquisition expenses, the company’s net income is down compared to a year ago, so this pricing seems a bit high to us. Wall Street analysts expect to see growth from the business next year up to $2.09 in earnings per share, which implies a forward multiple of 13. Given the company’s 3% dividend yield, we think 13x might be a fair valuation, but Texas Instruments will have to execute a turnaround in order to get to that point.

Some hedge funds showed increased interest in Texas Instruments Incorporated during the second quarter of the year. Jean-Marie Eveillard’s First Eagle Investment Management slightly increased its stake and finished June with 8.6 million shares of the stock in its portfolio. First Eagle has been a major investor in the stock for over a year (find more stocks owned by First Eagle Investment Management). International Value Advisers, managed by Charles de Vaulx, increased the size of its position by 12% to 3.9 million shares (see more stock picks from International Value Advisers).

We would compare Texas Instruments to QUALCOMM, Inc. (NASDAQ:QCOM), StMicroelectronics N.V. (NYSE:STM), International Business Machines Corp. (NYSE:IBM), and Hewlett-Packard Company (NYSE:HPQ). StMicroelectronics is expected to lose money in 2012, and its stock price has dropped 14% over the last year. With a revenue decline of 16% last quarter compared to a year ago, the company is doing even worse business-wise than Texas Instruments, yet its forward P/E of 14 (as it is expected to be profitable next year) is about the same. We think that Texas Instruments is a safer buy. Hewlett-Packard is also struggling: revenue down, stock price down, the works. Once again the sell-side expects a recovery, and in this case they are much more bullish than the market. The forward P/E for HP is only 4, and it made our list of the most popular technology stocks among hedge funds as value investors took an interest. We would want to take a closer look, but that number is quite appealing.

Giant IBM and Qualcomm joined HP as popular tech stocks hedge funds liked, and their businesses are on more stable ground. They trade at 15 and 18 times trailing earnings, respectively, and as such are cheaper than Texas Instruments on that basis. Their forward P/Es are about the same as that of TI, but we like that these companies have delivered more of those expected earnings already and so do not need to rely as much on growth. Of course, the fact that these larger companies also increased their earnings in their most recent quarter compared to a year ago- Qualcomm by 17%- gives us further confidence that they are better buys than Texas Instruments.