Is This Semiconductor Giant Undervalued?

In general, the more analyst and media attention a company gets, the harder it is to find a bargain. It's far easier to find undervalued companies in places where no one is looking. As for this company, though, it's constantly under analysis and discussion as it's a major player in the semiconductor business. A recent announcement regarding the company's future in mobile has shares trading down, down, down -- is this a rare moment of a highly visible tech company becoming undervalued?

Operative words
In the technology game, which is something I freely admit to know little about, it seems as though you need to have certain buzz words all over your business plan in order for analysts to like you. These are words like "cloud" and "mobile." Before the techies jump on my case, don't worry, I understand these are the industry trends that are imperative to remaining competitive. But let's use a closer lens than that to evaluate a company.

Texas Instruments (NAS: TXN) recently announced that it was exiting the mobile space. With the growth in the semiconductor industry aimed almost exclusively at mobile products, this was a tough bullet to bite. Let's be real, though, there are other devices using processors that can't fit in your pocket or your Moleskine case. The mobile space for chip makers is unbelievably competitive, and its basically a commodity to begin with -- the lowest price wins. Similar to discount grocers, I don't understand the desire to invest in a business where a major struggle is keeping margins at a near break-even level. 6Don't mind Texas Instruments exiting that game, let Intel (NAS: INTC) duke it out with Qualcomm (NAS: QCOM) . OK, techies, now you can yell at me for being ignorant.

Ridiculous industry
Unless you have a very clear competitive advantage, it doesn't make a lot of sense to be in the mobile semiconductor space. Texas Instruments was never the leader; it wasn't the first in the game, nor did it offer something the others didn't have. Year-end top-line revenue shrunk for the company, and one can easily attribute this to poor margins, high licensing fees, and an altogether poorly performing mobile business. So why were analysts so upset when TI just washed their hands of it? Why not focus on what actually makes money for the company and its shareholders?

While everyone is busy throwing stones, the company has increased its dividend payout, a trend its been on for the better part of a decade. Also take a look at the raw cash this beast brings in -- $3.25 billion last year. It was a little lower than the prior year's -- again due to eroding fundamentals in the mobile space and weakening PC demand -- but that's still a whole lot of moola. It shouldn't surprise investors that the company has steadily returned value in the form of stock buybacks.

Talkin' numbers
You may be tempted to ask, "Why buy a company that is exiting the mobile space, when you can buy one that dominates mobile instead?" Good question. If you were to take a look at Yahoo! Finance, Texas Instruments is actually more expensive on a forward earnings basis than Intel and only a hair cheaper than Qualcomm. As far as Qualcomm goes, I'll refer to my previous argument that the mobile semiconductor space is outrageously competitive and, even though Qualcomm is an industry leader, there isn't much of a moat there. Texas Instruments has a decent amount of exposure to emerging trends such as home automation and vehicle technology, which will require more and more chips.

I'm okay with letting Intel battle Qualcomm and NVIDIA for every inch of mobile territory while Texas Instruments looks a bit further down the road -- albeit in a less growth-explosive arena.

Of course, if you really want to be the value chaser in the semiconductor biz, look no further than Marvell (NAS: MRVL) . Marvell has gotten crushed in the market lately. But it trades cheaper on a forward basis than the majority of its competitors, pays a decent 2.6% dividend, and 69% of its business is non-mobile related. It certainly doesn't hurt that despite the big drop in share price, the CEO still owns 47 million shares. We can be sure he is pulling for a rebound just as much as the average retail shareholder.

I like Texas Instruments for its bold exit from mobile and its forward-looking ventures into the "smart" device arena. A low valuation coupled with a chunky dividend makes the stock look like it's a bit on the cheap side.

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Fool contributor Michael Lewis owns none of the stocks mentioned above. You can follow him on Twitter @MikeyLewy. The Motley Fool owns shares of Intel and Qualcomm. Motley Fool newsletter services have recommended buying shares of Intel. Motley Fool newsletter services have also recommended writing puts on Intel. The Motley Fool has a disclosure policy.
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