Wall Street's Shameful Discount of Texas Instruments

NEW YORK (TheStreet) -- It always amazes me to see how sometimes no matter what a company does, Wall Street can never be pleased. It is as if there is an unspoken, separate set of standards applied to some companies that rarely (if ever) matters to others -- remarkably, even when they are in the same sector.

Fairly or unfairly, this is where chip giant Texas Instruments finds itself. Favoritism is being shown by analysts to names such as Qualcomm and ARM Holdings -- particularly the latter, where its P/E of 65 suggests that the sky's the limit. But for Texas Instruments, at $32 the stock is deemed expensive, even though it trades at one-fourth the multiple of ARM and two points below Qualcomm.

As much as I hate to say it, this time the market has gotten it wrong.

I have grown more enamored with Texas Instruments recently. I think it now presents the better value of the three companies mentioned. In fact I have recently placed it second only to Intel among all of the chips in terms of present value. The fact of the matter is, when it comes to semiconductors, the price competition/margin trade-off is always a source of great concern for investors.

However, what investors are missing is, not only is Texas Instruments ubiquitous in several Apple products, but it continues to gain market share in areas such as amplifiers and power management systems -- while not as sexy as the smartphone and the mobile device market, they are significant enough to contribute handsomely to the company's annual rate of growth in terms of revenue.

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For Texas Instruments, its biggest challenge continues to be with convincing Wall Street analysts that it will be able to execute in a highly competitive market to justify trading at a higher multiple -- at least one that is able to meet ARM Holdings half way. Despite the stock trading below fair market value, it has not inspired enough buying to convince me that investors appreciate the tremendous opportunity Texas Instruments now presents. This was borne out by the company's earnings report earlier this week. Did it do enough to convince Wall Street?

The Quarter That Was

On Monday, the company reported better than expected first-quarter results that (disappointingly) went unnoticed by investors. The stock is now trading lower than it did at any point last week ahead of the report. The company announced revenue of $3.12 billion, above analysts' estimates of $3.06 billion, while posting a profit of 22 cents per share. The EPS includes an 10-cent charge that otherwise would have placed that amount at 32 cents -- well ahead of Thomson Reuters' consensus estimate of 29 cents.

In terms of outlook, Texas Instruments expects earnings for the second quarter excluding items to arrive in the range of 36 cents and 44 cents per share, while projecting revenue between $3.22 billion and $3.48 billion. These numbers are in line with estimates of 40 cents per share, and $3.29 billion in revenue. During the call, the company's CEO Rich Templeton offered that TI's "business cycle bottomed in the first quarter."

I think that comment should not have gone unnoticed by investors -- although the current trading activity suggests that it has. The company is now showing signs of growth, evident in a 13% increase in orders, which results in an ensuing growth in backlog -- always a great problem for companies to have.

There is no denying that competition in this space is going to continue to be fierce. We have not even mentioned Nvidia and a rebounding Atmel . That said, it is also undeniable that Texas Instruments appears set to be aggressive in not only seizing a good portion of the market, but in growing what it already has -- aided by the slight return in corporate IT expenditures and industrial business.

Wall Street should start appreciating that the company is doing a better-than-adequate job, no just maintaining its margins, but standing out from its rivals with state-of-the-art lower-cost manufacturing in place. That will further support expectations of growing EPS well into the future.

Bottom Line

From an investment standpoint, I have no doubt that this is a stock with the potential to hit $40 by the end of the year. When comparing its recent earnings and free cash-flow valuations I remain convinced that the stock is trading at a considerable discount to future earnings potential. Value investors with realistic expectations and patience should consider making a play for the stock and should be rewarded with not only a 20% premium over the next eight months, but also a respectable dividend yield.