In this article, let's take a look at Texas Instruments Inc. (TXN, Financial), a $52.68 billion market cap company, and one of the world's largest manufacturers of semiconductors. It also produces scientific calculator products and DLP products for TVs and video projectors.
A Market Leader
The tech industry is one of the largest exporting industries in the U.S. Although low costs have shifted production to other countries, the sub-industry is capital-intensive and requires constant investments in technology with the aim to reduce manufacturing costs. Further, it is a cyclical industry, and this is the major risk the firm faces.
TI paid a premium to acquire National Semiconductor and expand its manufacturing capacity. The expansion through the acquisition might attract additional high volume of analog chip orders. This could happen while minimizing costs, because analog products require less replacement than manufacturing digital products.
As a matter of fact, the company has focused on the analog chip business, the segment that contributes to the highest margins, and reduced its positions on the wireless chip business, which is a lower margin one.
We believe the company is a leader in the analog chip market. It competes in several markets, increases differentiation and gains exposure to many end markets and customers.
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.
Dividend Policy
Since 1962, Texas 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 2.5%, which can improve in the future allowing higher shareholder´s returns.
Revenues, Margins and Profitability
Looking at profitability, revenue growth by 7.92% led earnings per share to increase in the most recent quarter compared to the same quarter a year ago by 6.8% ($0.76 vs $0.56). During the past fiscal year, the company increased its bottom line. It earned $1.92 versus $1.50 in the previous year. This year, Wall Street expects an improvement in earnings ($2.51 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 | 23.49 |
| QCOM | Qualcomm Inc. | 20.17 |
| STM | STMicroelectronics NV | -5.77 |
| MU | Micron Technology | 31.49 |
| Ă‚ | Industry Median | 3.79 |
The company has a current ROE of 23.49% which is higher than the one exhibit by Qualcomm Inc. (QCOM, Financial) and STMicroelectronics NV (STM, Financial) and the industry median. In general, analysts consider ROE ratios in the 15-20% range as representing attractive levels for investment. So for investors looking at higher ratios, Micron Technology (MU, Financial) could be an option. It is very important to understand this metric before investing and it is important to look at the trend in ROE over time.
Relative Valuation
In terms of valuation, the stock sells at a trailing P/E of 23.2x, trading at a discount compared to an average of 72.4x for the industry. To use another metric, its price-to-book ratio of 4.9x indicates a premium versus the industry average of 1.81x while the price-to-sales ratio of 4.2x is above the industry average of 1.71x.
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 $21,505, which represents a 16.6% compound annual growth rate (CAGR).
Final Comment
As we have discussed, the goal of TI is to transform to a analog-based company because this segment make the highest margins for the firm. In the long term, we continue believe that the semiconductors sector is highly correlated to global GDP, so it should benefit from an improved in the global economy.
Trading near the 52-week high seems to be announcing a fall in price. However, we think that this situation is a powerful buy signal that might attract investors. Moreover, the stock's relative valuation and the return on equity that exceeds the industry average make me feel bullish on this stock.
Hedge fund gurus like Joel Greenblatt (Trades, Portfolio), Ray Dalio (Trades, Portfolio) and Wallace Weitz (Trades, Portfolio) added this stock to their portfolios in the second quarter of 2014, as well as Manning & Napier Advisors, Inc.
Disclosure: Omar Venerio holds no position in any stocks mentioned
