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Texas Instruments Will Continue to be a Good Candidate for a Long Position

August 06, 2014 | About:
ovenerio

ovenerio

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In this article, let's take a look at Texas Instruments Inc. (TXN), a $49.1 billion market cap company, which is one of the world's largest manufacturers of semiconductors. It alsoproduces scientific calculator products and DLP products for TVs and video projectors.

Analog chip market

The company is a leader in the analog chip market. Analog chips are used to convert real-world signals into digital ones. Good analog designs and high quality tend to be able to maintain pricing, as well as profitability in the future.Texas Instruments competes in several markets, increases differentiation and gains exposure to many end markets and customers.The company has walked away from the wireless chip business, which is a lower-margin one; and focused on the analog chip business, the segment that contributes to the highest margins.

The expansion through the large acquisition of National Semiconductor and shrewd purchases of cutting-edge manufacturing equipment might attract additional high-volume analog chip orders.This could happen while minimizing costs because analog products require less replacement than manufacturing digital products.

Next steps

The chip business may also see strong growth in the future. The company plans to integrate more functionality into single devices, increasing exposure to longer life cycle products for example in the industrial and automotive markets. On the internet boom, microcontrollers, Wi-Fi and Bluetooth chips should help the new electronics devices to improve connectivity and processing power.

Dividends history

Since 1962, Texas Instruments has a dividend policy showing its commitment to return cash to investors in the form of dividends as it generates healthy cash flow on a regular basis.The current dividend yield is 2.6%, which can improve in the future allowing higher shareholder´s returns.

Revenues, margins and profitability

Looking at profitability,revenue growth by 8.04% led earnings per share increased in the most recent quarter compared to the same quarter a year ago by 6.8% ($0.62vs $0.58). During the past fiscal year, the firm increased its bottom line by earning $1.92 versus $1.50 in the prior year. This year, Wall Street expects an improvement in earnings ($2.41 versus $1.92).

Finally, let´s compare the best measure of performance for a firm's management: the return on equity. The ROE is useful for comparing the profitability of a company to that of other firms in the same industry.

Ticker

Company

ROE (%)

TXN

Texas Instruments

20.01

QCOM

Qualcomm Inc.

18.99

STM

STMicroelectronics NV

-8.86

MU

Micron Technology

13.02

 

Industry Median

2.60

The company has a current ROE of 20.01% which is higher than the one exhibited by Qualcomm Inc. (QCOM), STMicroelectronics NV (STM) and Micron Technology (MU) and the industry median.In general, analysts consider ROE ratios in the 15-20% range as representing attractive levels for investment. It is very important to understand this metric before investing and it is important to look at the trend in ROE over time.

1407297320199.png

Relative valuation

In terms of valuation, the stock sells at a trailing P/E of 22.2x, trading at a discount compared to an average of 87.5x for the industry. To use another metric, its price-to-book ratio of 4.8x indicates a premium versus the industry average of 1.9x while the price-to-sales ratio of 4.1x is above the industry average of 1.72x.

As we can see in the next chart, the stock price has an upward trend in the five-year period. If you had invested $10.000 five years ago, today you could have $21.734, which represents a 16.8% compound annual growth rate (CAGR).

1407297269710.png

Final comment

The tech industry is one of the largest exporting industries in the U.S. Although the low costs have shifted production to other countries, the sub-industry is capital-intensive and requires investments to advance in technology and reduce manufacturing costs.

As we have discussed, the goal of Texas Instruments is to transform to a analog-based company because this segment make the highest margins for the firm. In the long term, the semiconductors sector is highly correlated to global GDP so it should benefit from an improved in the global economy.

Moreover, the stock's relative valuation and the return on equity that exceeds the industryaverage make me feel bullish on this stock.

Hedge fund gurus like Jim Simons (Trades, Portfolio), Ray Dalio (Trades, Portfolio) and Mario Gabelli (Trades, Portfolio) added this stock to their portfolios in the first quarter of 2014, as well as RS Investment Management (Trades, Portfolio), Manning & Napier Advisors, Inc. and PRIMECAP Management (Trades, Portfolio).

Disclosure: Omar Venerio holds no position in any stocks mentioned

About the author:

ovenerio
We provide independent fundamental research and hedge fund and insider trading focused investigation.

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