ADI Analog Devices Inc

Following the second quarter 2012 earnings announcement on July 23, more than half of the analysts covering Texas Instruments (TXN) have made downward revisions to their estimates. Low visibility, slow end market demand, weak order trends, European macro concerns, and intensifying competition could be the reasons for downward revisions.

Last Quarter Synopsis
 
Texas Instruments delivered a decent second quarter with pro forma earnings per share of 46 cents, exceeding the Zacks Consensus Estimate by 7 cents.

The company reported revenue of $3.34 billion, which was up 6.9% sequentially and toward the middle of the recently narrowed guidance range of $3.22–$3.48 billion. The strength in the quarter came from growth in core Analog, led by power management and growth in HVA and Logic.

Gross margin was 49.5%, down 22 basis points (bps) sequentially, impacted by lower insurance proceeds. It also declined 199 bps from the year-ago quarter, mainly on account of low utilization rates as well as lower revenue.

Agreement of Analysts

Estimate revisions for the upcoming quarter indicate declining sentiments, with 22 out of 27 analysts making downward revisions in the last 30 days. Also, for fiscal 2012, 17 out of 22 analysts made downward revisions, with only 1 analyst moving in the opposite direction.

The Zacks Consensus Estimate was 48 cents when the company reported its second quarter earnings. Texas Instruments projected third quarter revenue to come in between $3.21 billion and $3.47 billion (flat sequentially at the mid-point), well below the consensus estimate of $3.54 billion. The earnings for the quarter are expected at 34 cents to 42 cents per share.

The weak guidance provided by the management made the analysts to lower their estimates which took the Zacks Consensus Estimate to 44 cents. The analysts are also of the opinion that Baseband continues to be a headwind for the Wireless segment, which the company expects to phase out completely by the end of the year.

The majority of analysts believe that TI's guidance reflects a broad-based market slowdown, as well as company-specific weakness in wireless. However, they contend that once the end-markets improve, the company will recover soon, given its compelling product line, new design wins and significant gross margin leverage.

However, longer term, the analysts believe that TI's analog and embedded businesses will continue to drive growth. They also see potential margin expansion opportunities from the company’s cost cutting initiatives along with growth in higher-margin businesses. Additionally, the analysts contend that 300mm RFAB and cost synergies from the NSM acquisition will likely lead to margins and earnings upside going forward.
Impact on Estimates

As the majority of analysts have lowered their estimates over the past 30 days, the Zacks Consensus Estimate has fallen 5 cents to 44 cents for the upcoming quarter and 7 cents to $1.69 for fiscal 2012. In the past 90 days, the Zacks Consensus Estimate fell 6 cents for the upcoming quarter and 11 cents for fiscal 2012.

Conclusion

We remain optimistic about Texas Instruments’ compelling product line, the increased differentiation in its business and its lower-cost 300mm capacity. Also, the addition of National Semiconductor strengthens its product line-up and brings on board additional capacity.

We also believe that some of the new designs (analog and embedded processing products) getting into volume production should help the gross margin to move up toward its long-term target of 55%.

Moreover, in 2011, the company announced the closure of a couple of 6-inch facilities in Hiji, Japan and Houston, Texas, transitioning the remaining products to more advanced facilities. Of the $215 million in charges, $112 million were taken in the fourth quarter of 2011, with the remainder being spread out over the next seven quarters. The restructuring is expected to generate annual savings of $100 million a year.

However, we remain concerned about the macro weakness, Texas Instruments’ larger exposure to wireless communications infrastructure, and National’s huge debt balance, which has negatively impacted the balance sheet.

Increasing competition from Maxim Integrated Products (MXIM), Analog Devices (ADI), Broadcom (BRCM) and Intel (INTC) is also a matter of concern.

We, therefore, have a short-term Hold recommendation (Zacks Rank #3) on Texas Instruments’ shares.

About Zacks Earnings Scorecard

As a PhD from MIT, Len Zacks proved over 30 years ago that earnings estimate revisions are the most powerful force impacting stock prices. He turned this ground breaking discovery into two of the most celebrating stock rating systems in use today. The Zacks Rank for stock trading in a 1 to 3 month time horizon and the Zacks Recommendation for long-term investing (6+ months). These “Earnings Estimate Scorecard” articles help analyze the important aspects of estimate revisions for each stock after their quarterly earnings announcements. Learn more about earnings estimates and our proven stock ratings at  http://www.zacks.com/education/




 

 
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