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Kevin Kersten's Analyst Insights

Options Analyst Writer
Kevin Kersten
Author Bio

November 4, 2013 - Calculate Better Returns

You may know the name Texas Instruments (TXN) from the top of one of pricey graphing calculators, but Texas Instruments is more than just a calculator company. It is the fourth largest semiconductor maker in the US.

When most of us flip on the TV or answer our mobile phone, we give very little thought to all the semiconductors that are used in the process. Every electronic device has numerous chips in which all interact to make things work. Something as simple as a TV remote, has to take the push of a button, convert it into light and then beam it across the room. While the big computing names like Intel (INTC), AMD (AMD) and Apple (AAPL) get most of the attention, many of the chips that do the work are actually analog chips.

Digital chips process data in 1 and 0's while analog chips convert that information to allow it to allow real world interaction. In a day when it seems like everything is digital, one company is moving ahead by going back. Texas Instruments is focusing its operations on the analog markets and selling off some digital operations. There are lots of digital chip makers in China and elsewhere making the market highly competitive and with lower margins. Analog chips have longer product life cycles, guaranteed contracts and higher margins, which can be good for the bottom line.

With this strategy, Texas Instruments has moved its margins from 30% up to 50% over the last several years. This is good for the bottom line, although sales have not grown. In fact, this year sales are expected to shrink about 5%, although a bounce up of 3% is expected in 2014. The company is expected to pull in around $12.1 billion in sales which represents or 17% of the analog market.  Earnings Per Share this year is expected to come in at 1.92 ahead of last year's 1.51.

Ultimately, though the company is not about making products, making sales, or growing the business. It is about making profits and returning that value to shareholders. Having higher margins and more profits allows more cash for dividends and share repurchases. TXN stock has a dividend yield of 3% and over the last 9 years the company has reduced share count by 36%.

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Even though sales are shrinking, Texas Instruments is focusing on growing profits. The stock should be more steady than some of its peers and in a healthy business and a in a solid industry.

Given the slowing of sales, dividends, and general industry conditions a covered call could provide a way to pull in some extra premium on the company.  Going out to April the 40 call at a 38.62 net debit(buy stock at 41.72 and sell call at 3.10) has a 3.6% assigned return, 7.4% downside protection, and a 8% annualized return rate (for comparison purposes only).  The stock should continue to pay dividends and we should catch a $0.30 payout in January which will boost annualized returns another 1.6%. Texas Instruments seems like an attractive long term holding, a stock one would want in a portfolio so writing a covered call on a stock like this targeting an 9.6% annualized return is something to consider.

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