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Better Buy: Intel Corporation vs. Texas Instruments

INTC Gross Profit Margin (TTM) Chart

Intel (NASDAQ: INTC) and Texas Instruments (NASDAQ: TXN) are both considered slow growth plays in the chipmaking industry. Intel generates most of its revenues from high-end chips for PCs and data centers, while Texas Instruments sells cheaper analog and embedded chips for a wide variety of industries.

Last October, I compared Intel to TI and concluded that Intel was the better buy , based on its lower valuation, higher dividend yield, and growth potential in adjacent markets. My call was wrong -- since that article was published, shares of Intel have slipped 5%, while shares of TI have rallied 10%. Let's take a closer look at why TI outperformed Intel over those few months, and whether or not that situation could change this year.

INTC Gross Profit Margin (TTM) Chart

Source: YCharts

Top and bottom line comparisons

TI's total revenues rose 3% in fiscal 2016, compared to Intel's 7% growth last year. But looking ahead, analysts expect TI's revenues to grow 5% in 2017 and outpace Intel's 1% growth. That forecast assumes that Intel's PC and data center businesses will remain wobbly despite the launch of new chips, and that TI's automotive and industrial strength will persist with higher sales of connected cars and machinery.

On the bottom line, Intel's earnings rose 9% on a non-GAAP basis in 2016, but fell 9% on a GAAP basis due to currency headwinds and other expenses. Analysts expect its non-GAAP earnings, boosted by buybacks, to rise 3% this year. TI's net earnings rose 23% last year, thanks to its margin expansion and buybacks, and analysts expect its earnings to rise another 10% this year. Both companies have plenty of cash to spend on dividends -- but TI's forward yield of 2.6% remains slightly lower than Intel's yield of 2.9%.

The valuations and the verdict

TI currently trades at 25 times earnings, which is much higher than Intel's P/E of 17 and the industry average of 22 for broad line semiconductor companies. But that premium indicates that investors are more willing to invest in TI's better diversified business model of cheap higher-margin chips than risk exposure to Intel's sluggish PC and data center markets. Some of Intel's moves into adjacent markets are promising , but those businesses are still too small to offset slower growth at its two core businesses.

I'm personally not a fan of either stock at their current prices. TI's growth looks more promising than Intel's, but the stock is too pricey and its dividend is too low to justify a purchase. Intel is cheaper and has a higher dividend, but there are better income plays on the market now with higher yields and lower valuations.

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Leo Sun has no position in any stocks mentioned. The Motley Fool recommends Intel. The Motley Fool has a disclosure policy .

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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