3Q Earnings Preview: Is Texas Instruments Out Of Its Slump?

When investors see the results from Texas Instruments Inc. (Nasdaq: TXN), the No. 2 U.S. chipmaker, they may get a check on the health of overall technology. TI’s chips power computing and phones, but the No. 1 maker of analog chips has a huge market called Detroit.

While the Big Three automakers and foreign ones haven’t announced quarterly results yet, they did report generally higher September sales, a good indicator. Chips made by Dallas-based TI, which a year ago took over analog pioneer National Semiconductor Corp., manage an increasing number of functions in today’s “smart” vehicles.

Last year, about 8 percent of TI chips went straight into automotive products.

As well, TI’s analog chips are embedded in telecommunications switches sold by longtime customers such as Sweden’s Ericsson (Nasdaq: ERIC) to network operators, as well many other industrial products.

TI shareholders haven’t had a great year. Through Friday, TI shares have lost about 4.5 percent, closing last week at $27.81, valuing the company at $31.6 billion. By contrast, Intel, of Santa Clara, Calif., is valued at $106.4 billion.

TI shares rose 13 cents to $27.94 in midday Monday trading.

Analysts surveyed by Thomson Reuters expect TI to report mediocre results. Net income of $541.3 million, or 46.3 cents a share, is expected to fall 24 percent from $711 million, or 61 cents a year ago. Revenue is expected to fall 2 percent to $3.39 billion.

The outlook will be important, especially as TI looks to 2013 and beyond. What CEO Rick Templeton and CFO Kevin March predict will carry weight.

TI’s wireless chips using the OMAP standard from Britain’s ARM Holdings (Nasdaq: ARMH) also have been designed into the first generations of iPads from Apple (Nasdaq: AAPL), the world's most valuable technology company.

But engineers from HIS iSuppli have suggested the latest models of iPad, as well as iPhone 5, may be using Apple-designed chips manufactured by Taiwan Semiconductor Manufacturing Corp. (Nasdaq: TSMC), rather than TI.

Earlier this month, there was speculation that Amazon.com Inc. (Nasdaq: AMZN), the No. 1 e-retailer, might be eyeing TI’s wireless sector because it’s planning to ship its own smartphone, joining the Kindle and Kindle Fire tablets that Amazon contracts to Quanta Computer (Taipei: 2382) and others.

Amazon, in Seattle, had no comment but is expected to announce its own earnings on Thursday. TI’s executives will be asked about the deal anyway. Amazon reported cash and investments of $4.97 billion as of June 30, so it could likely finance a deal. The question would be if it wanted to handle the capital costs.

But TI could divest its wireless unit to Amazon, which could then contract all manufacturing back to TI or other semiconductor makers. In the second quarter, TI’s wireless unit reported an operating loss of $51 million on revenue that fell 39 percent to $342 million. A year earlier, there was a profit of $342 million.

Meanwhile, TI's strengths remain in its analog chips used for fast, low-power communications and in computing, which account for more than 60 percent of overall sales. TI's chips are in card readers, all kinds of communications systems and industrial controls, as well as consumer products like printers.

“The bar is low heading into earnings season,” said analyst Mark Lipacis of Jefferies, who ranks a “mature manufacturer” like TI among his top ideas in the chip sector. He rates the shares a “buy” with a target price of $33.