The Ratings Game: It’s not just Texas Instruments, Morgan Stanley warns


Chip stocks are sliding Wednesday after Texas Instruments Inc. issued weak results and a below-seasonal forecast that sparked fears of deepening problems for semiconductor names.

As one of the first chip makers to report quarterly results, Texas Instruments TXN, -6.54% has earned a reputation as a bellwether, prompting debate about what the company’s macroeconomic warnings mean for the rest of the sector.

Opinion: Texas Instruments tanks the chip sector and investors’ hopes for a rebound

Texas Instruments shares are off nearly 7% in Wednesday morning trading. The company’s outlook, which was far weaker than analysts expected, has helped drag down other semiconductor stocks, including NXP Semiconductors NV NXPI, -3.15%, Broadcom Inc. AVGO, -2.21%, Qualcomm Inc. QCOM, -0.87%, Advanced Micro Devices Inc. AMD, -0.16%, and Western Digital Corp. WDC, -2.85% The PHLX Semiconductor Index SOX, -1.60% is down 2.2% in Wednesday trading.

Morgan Stanley’s Joseph Moore told clients that the issues extend beyond Texas Instruments. “For us, this is a definitive indicator of demand conditions for broader based distribution-based businesses, not something specific to TI—and is consistent with our cautious view on the sector,” he wrote.

In Moore’s view, the questions posed on the company’s earnings call “were clearly trying to paint this as company specific, but the issues that would drive share shifts (changes in distribution strategy, or individual socket exposures) would have slow steady impact over years, not in any given quarter.” He sees Texas Instruments’ warnings as being in line with weakness in global purchasing managers’ indices (PMIs) and auto sales.

Moore has an equal-weight rating on Texas Instruments’ stock and bumped his price target down a buck, to $109.

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Other analysts told investors that it wasn’t yet time for a broad panic on chip names.

“In terms of the industry, two large questions remain: 1) are other semiconductor companies seeing the same; and 2) is this perhaps an early sign of building recession expectations through the supply chain?” Susquehanna analyst Christopher Rolland wrote. He’s not convinced yet of those broader read throughs, arguing that his channel checks and research indicated a less pessimistic backdrop while Texas Instruments has a history of being conservative.

Rolland rates the stock at positive and cut his price target to $140 from $145 following the report.

Evercore ISI’s C.J. Muse said that the view from Texas Instruments didn’t exactly align with more “relative upbeat” commentary from other chip companies, including Telefon AB L.M. Ericsson ERIC, +1.13% , Taiwan Semiconductor Manufacturing Co. Ltd. TSM, -1.07%, Teradyne Inc. TER, +2.87%, Monolithic Power Systems Inc. MPWR, +3.22%, Silicon Laboratories SLAB, +3.79%, and Amphenol Corp. APH, +1.44%

“Put simply, TI’s call for reacceleration in year-over-year revenue declines either portends a likely recession or that drivers of the weakness are company specific,” Evercore ISI’s C.J. Muse wrote in a Wednesday note to clients. “And the more and more we think about it, we think the miss was TI specific.”

Muse has an in-line rating and $125 target price on the stock.

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Regardless of whether Texas Instruments’ challenges are symptomatic of broader issues, Texas Instruments doesn’t seem particularly well positioned, according to Bernstein analyst Stacy Rasgon, who rates the stock at market perform and cut his target to $110 from $125.

“Shortly we will receive more guidance from peers as we work through the rest of earnings season, and will get some view on what is going on,” he wrote. “But the possibilities essentially boil down to either the industry getting wrecked (bad) or Texas Instruments suffering worse than others (also bad).”

He said that while investors might have been bracing for some sort of modest outlook reduction, what Texas Instruments delivered was “suggestive of material broad-based deceleration (in the best case) while potentially fueling concerns over the possibility of company-specific issues (in the worst case).”

At least 11 analysts cut their price targets on Texas Instruments shares after the report, according to FactSet, with the average target now standing at $126, 5.7% above recent levels. Of the 33 analysts surveyed by FactSet who track the stock, 14 have buy ratings, 17 have hold ratings, and two have sell ratings.

The stock remains in the black on the year, registering a 26% gain so far in 2019. The S&P 500 SPX, +0.11% has climbed 19% in that time, while the PHLX Semiconductor Index has increased 36%.


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