Texas Instruments’ Growth Rides on Robust Demand & Baseband Business Spin-off (TXN)

Analysts Craig Berger and Robert Pikover from FBR Capital Markets recommend Texas Instruments (NYSE: TXN) as Texas’ revenues continue to ramp back to pre-recession levels.

Its analog and embedded processing segments are doing well and will continue to do well in 2010 indicating increased market share for Texas amongst small analog competitors. Texas Instruments revenues will benefit from robust demand in the automotive and industrial sectors. The analysts also expect its margins to increase by at least 10 basis points to 53% as its operating expenses are to reduce.

Texas Instruments is also withdrawing its offerings from the baseband business and increasing focus on application processors and connectivity products. The baseband business requires considerable expenditure in R&D and scale of production to cater to multiple standards of various countries.

The management’s decision to withdraw from the baseband business should not worry investors as the total loss of revenues will translate to only a yearly loss in EPS of $0.05 and then of $0.09 in 2011 and 2012. However, the analysts are confident that the growth in analog and embedded business will more than make up for this loss in these years itself.

Based on this progress, the analysts have raised their EPS expectations from $1.90 to $2.05 in 2010 and from $2.05 to $2.10. The analysts feel that Texas shares are undervalued as of now with a P/E multiple of 10.2x and expects it to increase to 15x in 2010. Texas Instruments, with its 4Q earnings at $3 billion, is currently trading at $23.69.