Lull is likely in rebound of Texas Instruments

Question: I’ve done well with my Texas Instruments stock. Does it have still more jump in it, or is it time to sell?

Answer: The world’s largest maker of analog chips enjoyed a strong rebound thanks to increased orders from the industrial machinery market.

But semiconductors are a cyclical business, and the firm’s performance is slowing down. You must decide whether you want to take your profits before an expected lull, though the long-term future remains bright.

Consumers in developed markets aren’t buying computers and televisions as aggressively as they once were, and the industrial market is also losing momentum. The company expects lower revenue over the next couple of quarters.

Longer term, Texas Instruments has an enormous customer base and a large and effective sales staff. Besides analog, it has a leading market share in several other chip segments that enable it to cross-sell various products to long-term users.

Shares of Texas Instruments are up nearly 26% this year after last year’s 68% increase. Third-quarter revenue was up 30% compared with the third quarter of 2009.

The Dallas company has a strong balance sheet with plenty of cash and no debt, enabling it to provide dividends and buy back shares. It also has been able to buy advanced manufacturing equipment from bankrupt semiconductor firms.

The consensus analyst rating of Texas Instruments stock is between “buy” and “hold,” according to Thomson Reuters, consisting of 10 “strong buys,” 10 “buys,” 16 “holds,” three “underperforms” and one “sell.”

The most profitable portion of the company is its core analog-chips business, which it has been reemphasizing. Analog is best known for data converters that allow real-world analog signals, such as voice and video, to be processed digitally. Such chips are not as difficult or expensive to manufacture as some other kinds.

Texas Instruments also has a strong position in application processors for higher-end use in the growing smart-phone market.

Its famous calculators generate less than 5% of its revenue.

The company has veteran management. Richard Templeton has been chief executive since 2004. He became chairman in 2008.

Earnings are expected to increase 117% this year and 2% next year, according to Thomson Reuters. Analysts project the five-year annualized growth rate to be 10%, versus 15% expected for the semiconductor industry.

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Longleaf fund takes patience

Question: I’m a shareholder in Longleaf Partners Small-Cap fund. Is it still a worthwhile holding?

Answer: Although closed to new investors, this $2.6-billion fund has provided noteworthy results for its many long-term shareholders.

A decision on whether you stay the course depends on whether you are patient and have confidence in the fund’s experienced managers, who are clear about how they invest, are willing to take risks and always stick with their holdings.

Longleaf Partners Small-Cap fund, up 23% over the last 12 months, has a three-year annualized decline of 1.5% and a five-year annualized return of 4%.

“Managers Staley Cates and Mason Hawkins [co-managers since 1991] are some of the most experienced managers out there and highly respected for their commitment to a value investing strategy,” said Gregg Wolper, mutual fund analyst with Morningstar Inc. “This year it is not a standout one way or another, but over the long term it has done very well.”

Longleaf Partners Small-Cap fund has a concentrated portfolio of 20 stock names, holds sizable positions, and is willing to take chances on out-of-favor stocks. It buys small-cap companies trading at discounts of 40% or more to estimates of their intrinsic values. Managers estimate future free cash flow and net assets, and they consider the sale prices of comparable businesses. The fund lags behind the overall market at times.

Cates and Hawkins, who also manage Longleaf Partners fund and Longleaf Partners International fund, rely on a group of in-house analysts. Managers and analysts are required by investment advisor Southeastern Asset Management to keep all of their own invested assets in Longleaf Partners funds, aligning their interests with those of shareholders.

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Andrew Leckey answers questions only through the column. Write to him at [email protected].