Texas Instruments’ Earnings Trough Means Upside, Bulls Say

As a bellwether for the industry, Texas Instruments‘ decline in gross margins and downward guidance Monday are noteworthy coming out of a solid third quarter.

Gross margins declined 40 basis points quarter over quarter from 50.7% in the second quarter of 2011 to 50.3% in the third quarter,? and analysts see more gross margin declines in the fourth quarter due to acquisition related charges and lower utilization rates.

Christopher Danely at J.P. Morgan reiterated his Overweight rating and $35 price target for Texas Instruments (TXN), even though he lowered earnings projections per share, saying “fundamentals and estimates are bottoming and we expect the NSM acquisition to drive earnings growth throughout 2012.” Danely raised his calendar 2011 revenue estimate from $13.3 billion to $13.7 billion, but lowered calendar 2011 EPS from $2.12 to $1.86.? He raised calendar 2012 revenue estimate from $12.9 billion to $13.7 billion but lowered that year’s EPS estimate from $2.11 to $1.85 due to acquisition charges.? There are several signs that fundamentals are hitting a bottom, Danely says:

“Although TI��s book to bill declined from 1.04 in 2Q11 to 0.89 in 3Q11, management stated bookings have stabilized over the past two months and inventory in the channel is low.”

Patrick Wang at Evercore Partners similarly reiterated an Overweight rating and his belief that earnings are at a trough. He sees “a multi-year path to significant EPS driven by highly accretive leverage and scale-driven share gains with TI’s compelling cost structure.” He writes:

“We expect TI’s analog (18% global share) and EP units to not only stabilize with, but perform no worse than, the rest of the world — particularly entering 2012 with somewhat clean channel inventory. Importantly, we anticipate robust leverage from (1) ! 300bp GM lift in 1Q with the absence of the inventory true-up (2) reversal of NSM share losses aided by a sales force 2500 strong (3) compelling cost structure as management ramps 300mm RFAB — 20% utilized (4) NSM’s facilities — utilization in low- to mid-50′s. This should result in significant incremental GMs with 75+% fall-through. As such, while demand remains elusive and tough for the overall industry, we think shares appear attractive at current levels.”