Texas Instruments (TXN, Financial)Â reported the results of its second quarter Tuesaday, comprehensively beating consensus estimates. The Texas-based analog integrated-chips (ICs) maker managed to grow its revenue to $4.02 billion during the quarter, translating into 8.2% year-over-year growth. Analysts were modeling for revenue of $3.97 billion. Earnings came in at $1.37 a share, ahead of the analysts’ consensus of $1.32.
For the third quarter, Texas Instruments is guiding for midpoint revenue of $4.28 billion, slightly ahead of the Wall Street’s consensus of $4.25 billion. Earnings per share are set to reach $1.52 during the quarter as opposed to the consensus of $1.49. The market largely remained indifferent to earnings as the stock was unmoved in afterhours trading on Wednesday.
What drove the top line?
“Demand for our Analog and Embedded Processing products continued to be strong in the industrial and automotive markets,” said Rich Templeton, CEO of Texas Instruments, in an earnings press release yesterday.
Revenue from the analog segment – including power management ICs, amplifiers and motor drivers, among others – grew 12%, while embedded-segment revenue, including processors and connected microcontrollers, grew 9% year-over-year. It’s worth mentioning that revenue from custom ASIC declined 7%, which probably reflects the declining need of miners for cryptocurrencies.
As a side note, declining custom ASIC revenue is indicative of headwinds for GPU sales in the crypto arena, which can pressure earnings of Advanced Micro Devices (AMD, Financial) and Nvidia (NVDA, Financial) in the short term.
From an end-market perspective, top-line growth was fueled by automotive and industrial segments followed by low single-digit growth in personal electronics that includes smartphones.
In short, Texas Instruments’ growth is gaining traction with the rise of electronic components in automobiles alongside the adoption of machine-to-machine (M2M) communication on the industrial side.
What about the bottom line?
Although revenue grew in the single digits, Texas Instruments managed to post substantial growth in earnings per share, up 36% year-over-year. Cost discipline in R&D expenses, and selling, general and administrative (SG&A) expenses drove operating profit during the quarter while lower income taxes and buybacks helped earnings per share grow 36%.
Texas Instruments repurchased more than $1 billion of its common stock during the second quarter. Note that profit grew much faster than revenue growth even after excluding the impact of share buybacks and taxation.
Why didn't the market reward Texas Instruments?
For starters, Texas Instruments is already trading at a high multiple. The company is now trading at a trailing price-earnings ratio of 28.4, up 42% over the last year. It’s difficult to justify a premium multiple for top-line growth of just 9% during the quarter.
Although operating earnings grew 16%, earnings per share are expected to grow in the single digits (8%) sequentially. The slowdown in forward earnings per share growth might have put investors off of assigning a higher multiple to the stock.
Moreover, from a long-term perspective, the analog ICs market is set to grow at a compound annual rate of 6.9% between 2017 and 2022. This long-term trend also makes it difficult to justify a high price multiple for Texas Instruments.
Economic-value-added valuation reveals that the stock is priced for perfection. An assumption of 11% cumulative annual growth in earnings from 2018 to 2023 and 1% growth in perpetuity reveals a price target of $116.70. As the stock is already trading around this price and there has been no material change in growth expectations due to the second quarter results, the market is unwilling to expand the price multiple for Texas Instruments.
Takeaways
- Texas Instruments reported decent quarterly results, beating the industry in terms of growth.
- As the analog chip maker continues to surpass industry growth forecasts, the market is attaching a premium to the stock.
- However, as growth expectations remain unchanged for the most part during the second quarter, a higher price isn’t warranted.
- The stock remains priced for perfection and doesn’t offer much upside at current valuation.
Disclosure:I have no positions in any stocks mentioned and no plans to initiate any positions within the next 72 hours.
