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Despite setbacks, Texas Instruments remains a titan

Sun., May 8, 2011, midnight

Texas Instruments (NYSE: TXN) recently reported weak earnings, due partly to the disruption of operations at two chip factories in disaster-stricken Japan.

Damaged production lines and the costs associated with fixing them put an unexpected load on the bottom line. All told, TI saw both sales and earnings rise by 6 percent year-over-year, which was somewhat less than what Wall Street had expected.

The company’s book-to-bill ratio crept up above the crucial 1.0 benchmark as unfilled orders started piling up. That’s typically good, showing strong demand and shedding light on future revenue levels. This time, though, the rising ratio stems more from lowered production capacity than stronger orders.

TI will eventually repair its Japanese operations and resume filling orders. Moreover, its pending acquisition of National Semiconductor should pay off handsomely. CFO Kevin March points out that TI has a sales force 10 times the size of National’s, and that army is already trained to sell the kind of products National is making.

TI is facing strong competition in certain segments, but the business model is big enough and balanced enough to take a licking and keep on ticking. With an eye to further acquisitions to bolster sales growth, TI remains a titan of the chip industry – and an attractively valued one at that. (The Motley Fool owns shares of Texas Instruments.)

Ask the Fool

Q: A company I’m invested in wants to issue more stock. Should I vote for or against that? – A.W., New London, Conn.

A: It depends. Adding more stock can dilute the value of the existing shares. Imagine that Typewriter Land Inc. (ticker: QWERTY) has just 100 shares of stock outstanding, and you own 10 shares, or 10 percent of the firm. Then it issues 10 more shares. It now has a total of 110 shares, and your 10 now represent only 9 percent of the firm. The value of your shares appears to have dropped.

But consider why the company is issuing more shares. Sometimes it’s just to facilitate a stock split or for employee stock options. If the additional shares are to buy another company and the deal is structured well, then it may be a smart move. Perhaps the acquisition will add much more in value to your company than it’s costing in additional shares. Alternatively, if the company uses the money raised to grow its business effectively, shareholders can also win.

Q: What’s “negative amortization”? – M.J., Chicago

A: With mortgages, your monthly payments are typically applied toward interest owed and toward lowering your principal – the sum you owe the lender. Amortization is happening as your debt is being reduced over time.

But if your payment is less than the principal and interest due, then your principal grows. That’s negative amortization, featuring a growing, not shrinking, loan balance.

Many foreclosures these days are tied to adjustable-rate mortgages that have featured minimum payment options. These permitted borrowers to end up with negative amortization. Washington is looking to rein in negative amortization in mortgages.

My dumbest investment

My worst investment was my first one. Back in the late 1950s, I spotted a full-page ad in the Wall Street Journal announcing the development of a revolutionary new internal combustion engine named after its inventor: the Wankel engine. The stock price of Curtiss-Wright, which had acquired distribution rights to the engine, bounded up, and I bought shares. Shortly thereafter, it became clear that the engine was early in its development and far from being a commercially available product. The stock took a dive, and I learned my first lesson in investing. – D.N., online

The Fool responds: This is a classic investor mistake, getting excited about the potential of a company or new technology and buying stock without examining the big picture.

Even when a company has a superior technology, that’s not enough to reward shareholders. The time and the valuation must be right. The company must generate enough cash to keep running, manage its operations efficiently, market its offerings well and effectively face competition. The Wankel engine, a rotary design, is widely used today, such as in many Mazda vehicles.

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