TI shares drop on pre-earnings downgrade

Texas Instruments shares fell as much as 13 percent Wednesday after influential Lehman Brothers analyst Dan Niles downgraded the stock.

Texas Instruments Stock price from October 1999 to present.

Source: Prophet Finance

Although TI is likely to report earnings that match analyst forecasts, Niles said in a research note, the company's fourth-quarter chip sales may not meet earlier predictions. As a result, Niles lowered his rating on TI shares to "neutral" from "outperform."

TI will announce third-quarter earnings after market close Wednesday.

"We believe TI saw some significant order cancellations occurring late in the (third) quarter from some, if not all, of the top three wireless handset vendors," Niles said in the note. TI is the largest maker of chips for cell phones, a market that is growing fast but appears to be falling short of the most optimistic predictions made earlier in the year.

In early afternoon trading, shares of TI were down $1.75, or 4.4 percent, at $38.44. Earlier in the day, shares traded as low as $35.

Analysts are expecting the company to earn an average of 33 cents, according to the consensus estimate from First Call/Thomson Financial.

Niles said he believes TI will meet that forecast. But, he added, estimates for the fourth quarter and possibly for next year will need to be lowered because previous forecasts of 7 percent to 8 percent growth in chip sales from the third quarter to the fourth quarter are too optimistic.

"Though we were cautious before, we are even more cautious now on TI, as well as other vendors exposed to the wireless handset?market," Niles said.

In mid-September, TI trimmed its own forecast for the cell phone market, saying it sees industrywide handset sales in the range of 400 million to 435 million, down from its prior forecast of 435 million. However, at the time, TI said it believed its third-quarter financial results would meet earlier forecasts.