Texas Instruments becomes leaner to take on competitors

Tribune Media Services columnist

Q: Does Texas Instruments Inc. stock have potential? -- C.M., via the Internet

A: The decision of major customers Nokia Corp. and Ericsson LM to work with additional suppliers has been a disappointment for the world's largest maker of cell phone chips.

With competitors such as STMicroelectronics and Infineon gaining momentum, the company decided to lay off more than 400 manufacturing workers in its headquarters city of Dallas.

Yet the 77-year-old firm does retain the edge in technological savvy in the most profitable segments of the mobile phone market. It is expanding its supplier relationship with Motorola Inc.

Semiconductors make up 95 percent of its sales, and about 40 percent of those chips are destined for cell phones. The calculators bearing the firm's name represent only about 5 percent of overall sales.

It has done a good job of fine-tuning its manufacturing strategy to make profits more consistent by outsourcing some production during peak periods.

Shares of Texas Instruments (TXN) are up 13 percent this year following last year's 10 percent decline. Although net income rose 10 percent in the third quarter, its forecast for fourth-quarter revenue was below the average expectation of Wall Street analysts.

In keeping with its practice of rewarding shareholders, Texas Instruments recently raised its dividend by 25 percent. It also announced plans to buy back an additional $5 billion of its shares, bringing its total buyback authorization since 2004 to $20 billion.

The firm's analog chip business is a high-margin operation exhibiting strength and growth potential. Analog products process voice, sound, pressure, temperature and electricity into digital signals that can be converted back into real-world signals.

Texas Instruments is the revenue leader in the analog field but has just a 13 percent share of the fragmented segment. It possesses numerous analog patents and has had strong research and development.

The consensus Wall Street analyst rating of Texas Instruments shares is "buy," according to Thomson Financial, consisting of 11 "strong buys," 10 "buys," 12 "holds," and one "underperform."

Worldwide microchip sales are expected to grow nearly 8 percent, to $277 billion, in 2008, double the pace of 2007, according to the Semiconductor Industry Association. Looking further ahead, chip sales are projected to surpass $400 billion in 2010, according to the industry group.

Texas Instruments earnings are expected to increase 6 percent this year and 18 percent next year. The five-year annualized growth estimate is 15 percent.

Q:The performance of Fidelity Leveraged Company Stock Fund looks great, but is it too risky? --V.L., via the Internet

A: Its name does have a risky sound to it. The fund buys leveraged stocks, which are shares of distressed companies issuing junk bonds.

Some of those companies may go under. Another risk is that the portfolio is concentrated in a few industries, with energy currently leading the way.

Manager Thomas Soviero, who is also a high-yield-bond manager, works to reduce risk by diversifying the portfolio into 225 stocks. Results most recently benefited from its semiconductor and tanker stocks.

The $8.3 billion Fidelity Leveraged Company Stock Fund (FLVCX) is up 17 percent over the past 12 months through Friday to rank in the top 6 percent of mid-cap growth and value funds. Its three-year annualized return of 19 percent places it in the upper 2 percent of its peers.

"If you look at how this fund fared in the last recession, which was great, there's reason to believe it would weather the next recession fairly well," said Jim Lowell, editor of the independent Fidelity Investor newsletter (www.fidelityinvestor.com), in Potomac, Md. "The reality is that it has not been risky and uses its unique platform to be remarkable at both defense and offense."

The fund was launched in 2000, and Soviero, who manages a couple of other funds as well, became its manager in 2003. Utilizing Fidelity's research team, he looks for attractively priced stock in companies that can improve through management change or new products.

"I think it's an excellent holding, especially for a growth or aggressive growth investor," Lowell said. "But even growth and income investors could own it for perhaps 5 percent of their overall portfolio to add diversification to their mix."

Among major concentrations, energy represents 27 percent, industrial materials 21 percent and business services 17 percent. Largest holdings were recently Freeport-McMoRan Copper & Gold Inc., ON Semiconductor Corp., Service Corporation International Inc., Teekay Corp., Forest Oil Corp., Chesapeake Energy Corp., El Paso Corp., Amkor Technology Inc. and Celanese Corp.

This "no-load" (no sales charge) fund requires a $10,000 minimum initial investment and has a low 0.83 percent annual expense ratio.

Q: What is the difference between pro forma and GAAP (generally accepted accounting principles) earnings? It seems confusing. --V.P., via the Internet

A: Pro forma, a Latin term meaning "for the sake of form," when applied to earnings indicates results that may leave out some items that the company does not consider regular operations.

These unaudited numbers could, for example, exclude the restructuring costs after a merger or the amortization of certain assets. Although they can be helpful in giving a clearer picture of a company's performance, especially those in industries with unusual circumstances, some companies take liberties with pro forma to look better than they really are.

To keep the practice under control, the Securities and Exchange Commission enacted Regulation G in 2003, requiring that public companies using pro forma results in earnings releases also include GAAP figures and give a reconciliation of the two. It is always important to know the GAAP net income determined by accountants.

"Pro forma is selective about what's included in order to give a picture of what the company would have earned without these one-time costs and expenses and other items," said Sam Stovall, senior investment strategist with Standard & Poor's Corp. "GAAP, on the other hand, is specifically defined."

Andrew Leckey is a Tribune Media Services columnist. E-mail him at yourmoney@tribune.com.

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