February 04, 2007
Holdings: Texas Instruments (TXN) and AT&T (T)
Texas Instruments (TXN)
Texas Instruments specializes in production and marketing of high-technology components. Operations span 25 countries and divide into three divisions: E&PS (Educational & Productivity Solutions), Sensors & Controls, and Semiconductors. Semiconductors drive 87% of revenue. More than half (55%) of revenue comes from custom chip production for specific clients, the remainder of the revenue comes from general market products. Production of programmable DSPs represents a growing portion of the revenue, currently 40% of the semiconductor divisions revenue. The Sensors & Controls Segment produces focuses on commercial and industrial products and produces 9% of total revenue. E&PS supplies graphing calculators and provides 4% of total revenue.
Motorola announced on January 29th that it would begin using chips from Texas Instruments exclusively. The deal is a revenue boost, but will not be realized until late 2007, early 2008. Phones with only Texas Instruments chips will not reach the market place until 2008.
TXN is $5 off it’s 52-week high, $36.40 indicates that there is room for growth within the normal range. A beta of 2.3 and instuitional ownership of 73.5% demonstrate that growth may occur quickly and in a positive direction. The short percentage of the float, 2.3%, confirms a positive outlook in the short-term for TXN. For long-term growth the current ratio, 3.78, and Debt to Equity, .004, illustrate a solid foundation for future growth and good fundamentals.
Relative to most prominent competitor, Qualcomm Inc (QCOM), TXN does have a PEG that is 30% higher (1.33:1.02), but does have a multiple that is 56% lower (11.28:25.40). Indicating that TXN undervalued compared to its leading competitor, but that growth over the next 5 years may be speculative compared to the same competitors. Hence, TXN might be a better short-term play.
AT&T provides wireless communications, long-distance services, internet access as well as directory advertising in 241 countries. AT&T operates under multiple brand names such as SBC and Cingular Wireless. A joint investment by AT&T and Bell South (60%, 40% respectively), Cingular Wireless was the largest provider wireless phone service in the US; 54.1 million customers. With the acquisition of Bell South, AT&T gained full ownership of Cingular Wireless. The landline division of AT&T drives the majority of the revenue, with approximately 27 million retain consumer lines and 17 million retail business lines. AT&T also provides satellite television services through an agreement with EchoStar. The AT&T Corp. division provides internet access through broadband, dial-up, and WiFi mediums.
With the acquisition of Bell South and the consequential ownership of Cingular Wireless, completed December 29th, AT&T reported a 17% rise in profits in the fourth quarter of 2006. The rise was attributed to a surging amount of new customers and synergies of the acquisition of Bell South. net income was also up $1.94 billion (50 cents per share)
Only 4 cents off the its 52-week high, 38.18, AT&T is trading toward the high extreme of its normal range, but with the acquisition of Bell South and synergies expected to result throughout 2007, the normal range should shift. A beta of .36 indicates a stable stock, but might increase in volatility as ripple effects from the Bell South acquisition arrive in 2007. Only .06% ownership by insiders might be a cause for skepticism, but institutional ownership and the short percentage are at 41.5% and 1.2% respectively, indicating little pessimism based on market sentiment. A low current ratio .631 might be a limiting factor for growth and expansion in the future, but is also a logical by-product of the SBC merger and the acquisition of Bell South. Likewise the debt to equity is in the worrisome range at .528, since return on equity is only 8.66%. Looking at competitors, Qwest Communications International Inc.(Q), Spring Nextel Corp. (S), and Verizon Communication Inc. (VZ) AT&T does have a superior market cap, $146.49 billion and a reasonable low PEG, 1.45, compared to rivals. Net income is a positive indicator, 10.1% greater than leading competitor Verizon. Some notable factors for concern: operating margins are lower than Verizon (16.32%, 17.95%) and earnings are also lower than Verizon (1.885, 2.359). Added revenue from a record increase in subscribers during December (Cingular), earnings might increase. Operating margins should increase as ripples from the SBC merger and Bell South acquisition become more place and synergistic.
Posted by jwbir at February 4, 2007 04:53 PM