24/7 Wall St. 2007 Break-Up Values: Texas Intruments $35 (Currnet Price $31.20)

Texas Instruments (TXN; $31.19; Breakup Value $35 )

Texas Instruments has historically traded in a range of 3-5x sales, and the current ratio is a bottom-dwelling 3.2 despite the company posting record gross margins.  This tells us that the market is very concerned about the company’s exposure to the wireless market (i.e, cell phones) which makes up about 30% of net sales but is very volatile and currently in a sales trough, and it is this exposure that is most responsible for holding the valuation down. 

We could calculate the value of the calculator business if it were to be divested, but it’s such a small percentage of sales (currently 4%) that it is not a worthwhile exercise.  The company must want to keep this segment if they’ve held onto it for this long; the same goes for the DLP segment – these 2 businesses give TI the most exposure to average investors through a consumer focus and a branded product. 

TXN already sold off their second largest segment (after semiconductors) last year, unloading the RFID controls business for $3 billion, the proceeds of which were used to buy back shares.  All told the company retired 9% of the outstanding shares in 2006 alone; considering the low valuation and the fact that the company doesn’t pay much of a dividend, this was a prudent allocation of capital for shareholders.  After all, RFID may be the best idea ever that won’t make anybody rich, so getting out of this low-margin business was probably a good call by management. 

The company has no long-term debt, which may actually be a detriment, as the company’s clean balance sheet and $4b in net income has already attracted some private capital and LBO attention.

We think the best way to unlock shareholder value is for TI to divest the wireless chip segment; TI purists will probably gasp at this notion, but let’s consider that the company’s big push in the segment is a new line of chips for “low-end” cell phones – how great can margins be expected to come in at when you’re groping for the low end of the market?

If wireless was sold off, the growth rates and higher margins at the remaining semiconductor lines of DLP, DSP, and analog should allow the company to return to an industry multiple of 4 to 5x sales.  Under this scenario, the wireless group should easily sell for 2x sales, or roughly $10b, and with the slimmed-down TI trading in line with its peer group at 4x sales the total breakup value of TXN would come to $35/share.

Ryan Barnes