When James Glickenhaus, general partner of New York-based Glickenhaus & Co., looks into the future, he sees gadgets that will wirelessly merge some of the world’s favorite devices: the cell phone, the computer, the camera and the portable music player.
To make that happen, he said, gadgetmakers will need sophisticated microchips. And that’s why he has been buying shares in chipmaker Texas Instruments Inc. for the past few years and plans to continue to do so.
“When I look for growth, I look for companies that will be the building blocks for entire industries, for a lifestyle,” said Glickenhaus, who co-manages $1.3 billion. “The future need for this product is just vast.”
But the demand for cell phones, Texas Instruments’ largest business, may slow next year. Consumer spending could wane as shoppers contend with higher energy prices and mounting personal debt.
Additionally, industry observers agree that Texas Instruments is likely to see stepped-up competition for the cell phone market from its chief rivals, Qualcomm Inc., Broadcom Corp. and Intel Corp.
Wall Street, though, is discounting such potential negatives, forecasting a rise in Texas Instruments’ earnings and stock price. Indeed, shares of Texas Instruments, which derives roughly 87 percent of its revenue from chips, have had a great year, joyfully riding 2005’s surge in worldwide cell phone sales.
Its stock closed Friday at $32.93 a share, and this month the price topped $34, its highest point since March 2002, though well below the nearly $100 a share it touched in March 2000. After that, shares plunged with the downturn of a brutal semiconductor economic cycle, bottoming at $13.23 in October 2002.
Since then, said Chris Caso, analyst at Friedman, Billings, Ramsey Group Inc., Texas Instruments has restructured its production sources to better guard against abrupt shifts in chip inventories.
Analysts surveyed by Thomson Financial expect the Dallas-based firm to increase revenue and earnings by 13 percent and 22 percent, respectively, in 2006.
Diversification has helped. Though cell phone chips are its largest business, chips for digital light-processing televisions make up one of its fastest-growing product lines, Caso said. “They have a lot of operating leverage when capacity gets tighter and prices rise,” Caso said. “These guys certainly have the ability to improve their margin.”
For the third quarter, Texas Instruments’ gross margin hit 49.3 percent, while its operating margin was 22.7 percent, which compares well with rivals in the same product lines, Caso said.
But wait, said longtime semiconductor investor Fred Hickey, editor of The High-Tech Strategist newsletter. Is the future really that bright?
Rather than a prolonged consumer-driven boom, Hickey sees a country overrun by debt and an economy teetering on the brink of a recession.
The tipping point for consumers may finally be here, Hickey said, and rather than a soaring 2006 for Texas Instruments, the chipmaker could be in for a slowdown.
Technology research firm Gartner Inc. reports that world cell phone sales are expected to have grown 20.1 percent during 2005, but it is forecasting 10 percent to 15 percent growth for next year.
“The sustainability of its end market is questionable,” said Hickey, who is based in Nashua, N.H. “Cell phones will continue to be sold, of course, but not at previous rates.”
Additionally, Hickey sees a stock trading at roughly 23 times the company’s estimated 2005 earnings. That’s an expensive price for company in a maturing business, he said.
But a saturated cell phone market is only one of Hickey’s concerns. He sees an economic storm brewing, reason enough to shy away from a volatile industry such as semiconductors.
Chief concerns are continued interest rate hikes and a winter of higher gasoline and home heating fuel prices. Add to that higher minimum payments on credit cards, and Hickey speculates that consumers finally will cut back on their spending.
“If you had to write a script, these are the conditions to have a recession,” he said. “With semiconductors, you’re potentially buying at the top, and remember, declines in semiconductor stocks are violent.”
Glickenhaus remains upbeat. He counsels investors to look long term, saying demand for electronic devices will provide Texas Instruments with sustained revenue and share price growth.
Mirroring Wall Street estimates, Caso has a 12-month price target on the stock of $40.
“People take profits so inelegantly these days,” Glickenhaus said. “On weakness, I would buy TI, and it will be a good holding.”
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E-mail llazaroff@tribune.com.
