Texas Instruments Incorporated (TXN)

Equity
US
Technology

RISK

RETURN

Key risk factors

Negligible price volatility

Strong trading liquidity

Strong & resilient to price shocks

Key return factors

Very strong margins and returns

Solid dividends

Favourable price performance

Company profileTexas Instruments Incorporated designs, manufactures, and sells semiconductors to electronics designers and manufacturers worldwide. It operates in two segments, Analog and Embedded Processing. The Analog segment offers power products to manage power requirements in various levels using battery-management solutions, DC/DC switching regulators, AC/DC and isolated controllers and converters, power switches, linear regulators, voltage supervisors, voltage references, and lighting products. This segment also provides signal chain products that sense, condition, and measure signals to allow information to be transferred or converted for further processing and control for use in end markets, including amplifiers, data converters, interface products, motor drives, clocks, and sensing products. The Embedded Processing segment offers microcontrollers that are used in electronic equipment; digital signal processors for mathematical computations; and applications processors for specific computing activity. This segment offers products for use in various markets, such as industrial, automotive, personal electronics, communications equipment, enterprise systems, and calculators and other. The company also provides DLP products primarily for use in projectors to create high-definition images; calculators; and application-specific integrated circuits. It markets and sells its semiconductor products through direct sales and distributors, as well as through its website. Texas Instruments Incorporated was founded in 1930 and is headquartered in Dallas, Texas.

Valuation: Greatly overvalued

Multiple

TTM

NTM

P/E

30.40

38.40

PEG

5.10

P/B

10.60

8.30

P/S

10.70

11.40

P/FCF

191.10

46.30

EV/EBITDA

23.20

22.80

Based on key historical and expected multiples, the stock is greatly overvalued relative to its peers. Specifically, the stock is fairly valued on P/E, overvalued on EV/EBITDA, and overpriced on P/FCF.

Performance: Favourable

Over the last six months, the stock performance has varied, with an increase following a drop. The stock's price trend wasn't definitive when matched against its global counterparts from the same sector and industry (as depicted above). Over the past six months the stock has exceeded the performance of this peer group by 25ppts and its growth accelerated by 12ppts in the past month. This is equally valid for peers from the same country and industry. Given the stock's valuation versus its peers, its total price movement is favourable. This generally signifies that a stock is fairly valued or marginally undervalued abd is becoming more 'expensive', suggesting a short-term spike in confidence by the market at large.

Analyst view: Slightly negative

The average target price is 177 and suggests 10% downside potential. Usually, this means a SELL recommendation among investment firms, or a recommendation to decrease one's position in this instrument in the next 12 months. The most optimistic analyst has a target price of 225.0. This translates into 14% upside potential in the best case. On the other hand, the most pessimistic analyst has a target price of 115.0. This is equivalent to 42% downside potential in the worst case.

Profitability: Very strong

RoE

Texas Instruments Incorporated reported a return on equity (RoE) of 34.9% in the last 12 months, down from 41.4% in FY23. The market consensus projects an RoE of 29.2% in FY24, again ahead of its peers.

RoA

Another important profitability metric, return on assets (RoA), amounted to 17.6% in the last 12 months, a decrease from 21.9% in FY23. The market analysts predict that RoA will be 15.7% in FY24, again stronger than its peers.

RoCE

In the last 12 months, the return on capital employed (RoCE) declined to 19.6%, above the peers. The consensus estimate for FY24 for RoCE is 20.3%, again ahead of the peers.

Net margin

EBITDA margin

Historically, TXN has reported very strong net margins compared to its global peers. Specifically, in the last 12 months, this metric equalled 35.2%, down from 37.2% in FY23. The company has reported very strong EBITDA margins compared to its global peers in recent years. EBITDA margin amounted to 49.0% in the last 12 months, a decline from 51.4% in FY23.

RoIC / WACC = 3.5(excellent value creation)

The ratio of return on invested capital (RoIC) to the weighted average cost of capital (WACC) has been 3.5 in the past several years. This ratio implies a excellent shareholder value creation.

Growth: Poor

Revenue

EBITDA

EPS

Free cash flow

TXN reported revenue of USD 16 801mn in the last 12 months, down 4% from FY23. At the same time, the dynamics of cash flow, as measured by free cash flow (FCF), were drastically different. EPS fell 9% from FY23 to USD 6.48. Market expects EPS to reach USD 5.12873 in FY24.Revenue has been growing very slowly over the past several years (middle negative), while slow revenue growth and a stable cost base have translated into weak EBITDA growth (negative-to-neutral). Net income has fallen in recent years (negative). FCF has fallen rapidly, far faster than EBITDA. We emphasize the highly volatile dynamics of EBITDA and FCF.

Dividends: Solid

Dividend paid

Dividend yield

The company has a track record of regular dividend payments. It has paid dividends in each of the past ten years. Dividend per share (DPS) has grown yearly, and there is an evident trend. In the past 12 months, the dividend yield has been good and slightly above its peers. On average, the company pays dividends quarterly, which may appeal to investors valuing a regular income stream.

Default risk: Limited

The risk of default is minimal. We note robust profitability, solid return on capital, strong debt servicing capacity, adequate interest coverage, and solid cash flow generation, among the positive credit factors. Among the negative credit factors, we point to slow historical revenue growth, excessive margin volatility, and poor working capital management.

Volatility: Negligible

In normal market circumstances, TXN is not volatile. Put differently, without outstanding market volatility or shocking company news, the stock's price will stay within a narrow range. The stock's losses on its worst days (less than 1-5% of the time) will range from very low to negligible.

Stress-test: Negligible

In highly turbulent market conditions, TXN is not volatile. In other words, the stock will fall far less than the index in times of extreme market volatility or shocking company news. Standalone, the worst-day losses (less than 1% of the time) will likely be very low.

Selling difficulty: Very low

TXN boasts very high trading liquidity. The average private investor can sell his common position in the stock immediately. Liquidity is usually very stable and remains favourable on the days with the lowest activity. The trading volume mostly stays the same even under highly turbulent market conditions.

Country risk: Very low

The institutional, legal, and compliance risks associated with the company's country are minimal. In combination with stringent business standards, shareholder rights are very highly protected.

Other risks: Negligible

No other major risks have been identified.