Texas Instruments (TXN, Financial) reported its second quarter fiscal year (FY) 2016 earnings on July 25. The semiconductor manufacturer based in Dallas, Texas, reported a year-on-year sales growth of 1% to $3.27 billion and 12% profit growth to $779 million. The company’s shares closed 7.85% the following day, while the broader index, S&P 500, closed almost flat at 0.03% in the same time period.
Valuations
According to GuruFocus data, Texas Instruments had a trailing 12-month (ttm) price-to-earnings multiple of 23 times (industry median at 20), price-to-book value multiple of 7 times (industry median at 1.6) and price-to-sales multiple of 5.5 times (industry median at 1.48). The company also had a ttm dividend yield of 2.19% with a 50% payout ratio and a share buyback ratio of 3%.
(Texas Instruments, Company Website)
Market Performance
According to Morningstar data, Texas Instruments had a total return of 22% for the past five years, while the S&P 500 provided 14.4%. Year-to-date, the industrial company had given 28.6%, while the latter provided 9.6%.
(Texas Instruments, Annual Filing)
Texas Instruments
In its filing, Texas Instruments began its operations in 1930. The company designs and makes semiconductors that it sells to electronics designers and manufacturers all over the world. Texas Instruments has two reportable segments: Analog and Embedded Processing.
According to Texas Instruments, it focuses its resources on the two aforementioned segments because it believes that these segments’ long product life cycles, intrinsic diversity and need for less capital-intensive manufacturing provide a combination of stability, profitability and strong cash generation.
Texas Instruments business model believes that the company’s free cash flow growth is important. Through this growth, the company would be able to maximize shareholder value over the long term.
Business in semiconductor manufacturing and selling is Texas Instruments expertise. According to the company, semiconductors are electronic components that serve as the building blocks inside modern electronic systems and equipment (1). Texas Instruments sells catalog, application-specific standard and custom semiconductor products (2).
(Texas Instruments, Company Website)
Analog Semiconductor Segment
According to Texas Instruments, Analog Semiconductors are able to change real-world signals, such as sound, temperature, pressure or images, by conditioning them, amplifying them and often converting them to a stream of digital data that can be processed by other semiconductors, such as embedded processors.
Analog Semiconductors are also used to manage power in every electronic device by converting, distributing, storing, discharging, isolating and measuring electrical energy, whether the device is plugged into a wall or running off a battery (3). Analog products are used in many markets, particularly personal electronics and industrial.
Texas Instruments had a leading market share, 18%, in the $45 billion Analog Semiconductors market as of fiscal year 2015.
In FY 2015, Analog Semiconductor contributed 64%, or $8.3 billion in total Texas Instrument sales. The segment also had the higher operating margin at 37% compared to the Embedded Processing segment. Analog Semiconductor also grew by 2.9% in 2015.
In second quarter 2016, the Analog Semiconductor segment grew flat (0%) to $2 billion in sales year-on-year.
Embedded Processing Segment
Texas Instruments claimed that its Embedded Processing products are the “brains” of many electronic devices. Embedded processors are designed to handle specific tasks and can be optimized for various combinations of performance, power and cost, depending on the application.
Further, the devices vary from simple, low-cost products used in electric toothbrushes to highly specialized, complex devices used in automotive applications such as infotainment systems and advanced driver assistance systems (ADAS). Texas Instruments’ Embedded Processing products are used in many markets, particularly industrial and automotive (4).
In FY 2015, Â the Embedded Processing segment contributed 21%, or $2.8 billion in total Texas Instrument sales. The segment also had an operating margin of 21% and had grown by 1.7% in that period.
In second quarter 2016, the Analog Semiconductor segment grew by 9% to $690 million in sales year-on-year.
In the past five years (FY 2011 – 2015), Texas Instruments’ sales and profit growth averages were -1.4% and -1.55%, respectively.
(Texas Instruments’ Does Businesses in these Major Markets, Annual Filing)
Cash, Debt and Book Value
As of June 30, Texas Instruments had a total cash of $2.5 billion. The company also had a total debt of $3.6 billion with a debt-to-equity of 0.36 times. Texas Instruments also had 37%, or $5.8 billion, of its assets in goodwill and intangibles. The semiconductor manufacturer had a book value of $10 billion.
(Texas Instruments, Image Source)
Cash Flow
(Texas Instruments Cash Flow, Quarterly Filing)
TTM, Texas Instruments delivered a 9% growth in its cash flow from operations to $4.46 billion. The company also allocated $585 million in capital expenditures leaving it with $3.87 billion, a 7% change from the same time period last year.
(Texas Instruments Cash Flow, Quarterly Filing)
TTM, Texas Instruments provided $4.07 billion in dividends and share repurchases. As can be observed, the company lessened its share repurchase activities, but increased its dividend allotment by 8%. The amount returned to shareholders in this period was 105% of Texas Instruments' free cash flow.
According to the company, it has a targeted cash return of 100% of free cash flow, plus proceeds from exercises of equity compensation minus net debt retirement.
Conclusion
Texas Instruments is an outstanding semiconductor business company. The company not only has a leading market share in its business, but also had a clear definition on how it will serve its shareholders. The company has maintained a strong balance sheet, but with a little more of goodwill and intangibles than I would prefer.
Nonetheless, Texas Instruments' current valuation does not present any discount compared to its peers.
Also, despite the slowing of overall business growth in recent years, Texas Instruments received recently several upgrades from analysts: Exane BNP Paribas, Bernstein and Bank of America Merrill Lynch. Whereby, the latter two ranked Texas Instruments’ shares as an OUTPERFORM and a BUY, respectively (5). RBC Capital, for example, had a price target between $75 and $80 a share for Texas Instruments.
(Texas Instruments’ Share Price, Google Finance)
Meanwhile, using the company’s past five-year earnings multiple and its expected earnings-per-share this fiscal year, I arrived at a value of $61 a share. Contrary to what analysts suggested, I think prospective investors must refrain from purchasing Texas Instruments shares right now and wait for a good pull back.
In summary, Texas Instruments is a HOLD.
Notes
(1) Annual filing: Semiconductors, generally known as “chips,” combine multiple transistors on a single piece of material to form a complete electronic circuit. Texas Instruments have tens of thousands of products that are used to accomplish many different things, such as converting and amplifying signals, interfacing with other devices, managing and distributing power, processing data, canceling noise and improving signal resolution. This broad portfolio includes products that are integral to almost all electronic equipment.
(2) Annual filing: Catalog products are designed for use by many customers and/or many applications. The life cycles of catalog products generally span multiple years, with some products continuing to sell for decades after their initial release.
Application-specific standard products (ASSPs) are designed for use by a smaller number of customers and are targeted to a specific application. The life cycles of ASSPs are generally determined by end-equipment upgrade cycles and can be as short as 12 to 24 months, although some can be used across multiple generations of customers’ products.
Custom semiconductor products are designed for a specific customer to use in a specific application and are sold only to that customer.
(3) Annual filing: Analog segment discussion is further divided into: HVAL, Power, HPA and SVA.
(4) Annual filing: Embedded Processing segment includes the following major product lines: Microcontrollers, Processors and Connectivity.
(Read: Texas Instruments Recent Annual Report)
(5) Financial Visualizations.
Disclosure: I do not have shares in Texas Instruments.
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