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Topic: Growth Stocks

Texas Instruments has better things to make than mobile phone chips

Investment Counsellor

Every Thursday we bring you one of our best U.S. stock picks. You get our specific recommendation on the stocks we profile, with a full explanation of how we arrived at our opinion. You will read about stocks making moves you should know about, most often from coverage in our newsletter on U.S. investing, Wall Street Stock Forecaster. This week’s U.S. pick comes from our advisory for more aggressive investors, Stock Pickers Digest.

Over 30 billion devices—including things like home thermostats and appliances—will be connected to the Internet by 2020.

That means you’ll be able to control them with a smartphone, set them up to adapt to factors like outside temperatures and have them notify you if, for example, there is smoke or carbon monoxide in your home.

This is known as the “Internet of Things.” The best way to profit from it is with companies that already power much of the Web’s infrastructure. (Two weeks ago, we analyzed another stock due to benefit from this development: see the article here.)

TEXAS INSTRUMENTS INC. (Nasdaq symbol TXN; www.ti.com) specializes in analog chips, which convert inputs like touch, sound and pressure into electronic signals computers can understand.

Manufacturers use these chips in a variety of products, including cars, cameras, medical devices and appliances.

The company’s earnings jumped 30.5% in 2014, to $2.8 billion from $2.2 billion in 2013. Texas Instruments spent $2.8 billion on share buybacks during the year. As a result, earnings per share gained 34.6%, to $2.57 from $1.91.

Revenue rose 6.9%, to $13.0 billion from $12.2 billion. Strong demand for analog and embedded processor chips (which perform mathematical calculations) offset lower sales of other chips and handheld calculators.

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Tech stocks: Dropping mobile phone chips cuts costs by more than 10%

The company stopped making digital chips for mobile phones in 2013, due to intense competition from larger chipmakers like Intel. As a result, its research costs fell 10.8%, to $1.4 billion (or 10.4% of revenue) in 2014 from $1.5 billion (or 12.5% of revenue) in 2013.

Thanks to its rising revenue and improving efficiency, the company’s gross profit margin (gross profits as a percentage of revenue) rose to 56.9% from 52.1%.

The company’s earnings will probably improve by 12.1%, to $2.91 a share, in 2015, and the stock trades at a reasonable 18.6 times that estimate. The $1.36 dividend yields 2.5%.

Texas Instruments is a buy recommendation of our advisory on U.S. investing, Wall Street Stock Forecaster.

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