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Tuesday, October 31, 2006

Could TI Get A Break? How About AMD Or Intel?

Stocks: (INTC)(TXN)(AMD)(MSFT)

If a stock or group of related stocks falls far enough, you can always find someone on Wall St. who thinks they are cheap. The new darling of that crowd is Texas Instruments.
The argument is not completely without merit. Sales of devices that use chips from TI may improve, but, they may not. Cell phone sales are actually projected to grow less than 10% worldwide next year down from over 20% in 2006. Total cell phone sales may approach one billion units for the current year, but Texas Instruments needs that market to keep a torrid pace.

If TI’s core markets like cell phones and consumer electronics devices do not move up sharply, the stock is not exactly cheap. It trades at about $31 now. But, over the last two years, it has been as low as $21. It could still fall a fair amount to stay in its 24-month range. Its performance over that stretch has been about the same at the S&P 500, which means it is up about 20%.

The case for Intel and AMD having better 2007s is also built on a reasonable foundation. Microsoft Vista will need powerful chips so that PCs can take advantage of all of the new OS’s features. But, price wars have hurt margins at the x86 producers, and there is not reason to assume that the trend will simply disappear because Vista needs better chips. Dell, Lenovo, and Hewlett-Packard are not inclined to pay any more for components than they have to.

AMD may not need a lot of good news to recover. At it current level of about $21, it is off by half from its 52-week high. Investors assume that Intel’s new dual core and quad core products are going to hurt AMD’s PC and server share. But, if the No.2 maker of x86 products shows that it can gain some of the market without further margin erosion, the stock might get some of its groove back.

It is unlikely that Intel and AMD would both go up at the same time. What Intel loses, AMD tends to gain. And the same holds true in both directions. Intel is also beaten down. In the summer of 2005, the stock was close to $29. It now trades at $21, so a sliver of good news could move it up.

The chip companies may do better in 2007. But, there would have to get some breaks that hardly fall into the “sure thing” category.

Douglas A. McIntyre can be reached at He does not own securities in companies that he writes about.

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