Is Texas Instruments Stock A Buy?

A recovering economy, excellent capital allocation, robust R&D, good dividend yield, extensive product portfolio and high operating margins makes Texas Instruments is uniquely positioned to leverage the digital transformations taking place in industrial and automotive markets

Texas Instruments Incorporated [NASDAQ: TXN] is an American technology company, which designs, manufactures, tests and sells analog and embedded semiconductors in industrial, personal electronics, automotive, communications equipment and other markets. 

It operates in two segments:

• Analog and
• Embedded Processing.

It is often said that the history of Texas Instruments (TI) is very closely associated with the American electronics industry.

TI produced the world’s first silicon transistor in 1954, and the first transistor radio the same year. It was a TI engineer Jack Kilby who invented the first semiconductor integrated circuit in 1958, and introduced the first single-chip microcontroller (an assembly of electronic components, fabricated as a single unit onto one piece of silicon) in 1970, which helped fuel the modern electronics revolution.

TI also invented the hand-held calculator in 1967. The company, which traces its roots to Geophysical Service, a petroleum-exploration firm founded in 1930, is based in Dallas, Texas.

Is Texas Instruments A Good Investment?

Long-term investors in Texas Instruments [NASDAQ: TXN] have reaped rich returns over the years.

TXN has been a major beneficiary of increasing automation of factories and automobiles and the same is reflected in its ballooning stock price. 

Despite the economic wreckage caused by the pandemic, TXN has returned more than 265 percent over the last five years, which is mainly made up of capital gains, but also dividends. The stock gained 28% in 2020, and is up 4.5% this year.

Texas Instruments derives a larger portion of its revenue from manufacturers of industrial equipment, and as such, its earnings and forecasts to a certain extent serve as a broader guide of how the economy is performing.

The company is one of the largest manufacturers of semiconductors, which are employed in the manufacture of various kinds of electronic devices, ranging from vehicles to home electronics and computers.

“We had a strong quarter driven by strong demand in automotive, industrial and personal electronics,” Chief Financial Officer Rafael Lizardi said in an interview.

TXN Dividends Are Stable And Growing

Another major factor favoring Texas Instruments is that it is a very good dividend payer, which makes the company an interesting option for dividend investors as well. 

The company’s dividends per share have risen significantly over time, and this year, the yield is 2.56%. In fact, the company this year increased dividend per share by 13%, marking its 17th year of dividend increases. 

In the fourth quarter, the chip maker paid $937 million in dividends. Over the last 12 months, it has paid $3.4 billion in dividends and purchased $2.6 billion of its shares, reducing outstanding share count by 1.4% in 2020.

The company is known for returning much of its free cash flow to its shareholders in the form of dividend payouts. Over the same period, its dividend represented 62% of free cash flow, underscoring its sustainability.

Free cash flow is the actual amount of money left over after all operating expenses, interest payments, investments, etc., to be distributed to the owners of the company –  in other words, to shareholders. Its balance sheet remains strong with $6.6 billion of cash and short-term investments at the end of the fourth quarter.

Texas Instruments Revenue Is Impressive

Benefiting from a rebound in the industrial, personal electronics and automotive markets, TXN delivered a solid Q4 results, with both revenue and profit easily topping analysts’ expectations.  Net income rose to $1.7 billion, or $1.80 per share, from $1.07 billion, or $1.12, a year earlier. 

Revenue rose 22%, year over year, to $4.08 billion.  Analysts had been modeling $3.61 billion on EPS of $1.34 per share. 

Buoyed by the solid fourth-quarter performance, the semiconductor giant gave a bullish forecast for the current quarter, signaling that demand is rebounding for semiconductors for vehicles, personal electronics and industrial use.

For the period ending in March, the company sees revenue in a range of $3.79 billion to $4.11 billion, and EPS of $1.44 to $1.66. Those are both well above analysts’ expectations for $3.59 billion and estimated profit of $1.33 a share.

Texas Instruments is currently a market leader in analog chips and embedded processors.  Analog chips are small electronic circuits which can read and process waveforms such as speech, music and video and convert them into digital signals. 

Embedded processors are essentially tiny computers that use simple microprocessors. They are common in automobiles, industrial machines and in household appliances.

From a year ago, Analog revenue grew 25% and Embedded Processing grew 14%, for the 90-year-old company.

The stellar results, in spite of the pandemic disrupting many industrial companies and bringing to a halt production in major automobile companies, speaks volumes, about the Dallas-based company’s resilience, technological innovation and manufacturing superiority.

The company irrespective of the economic headwinds, continues to generate cash flow, reduce debt, buy stock and keep raising its dividend. 

Texas Instruments boasts of a large and diverse product range with a huge application base. The company generated around 60% of its revenue from the industrial and automotive markets last year, with 75% of its revenue coming from analog chips.

Its embedded processing chips, which include connected microcontrollers and processors, contributed another 18%.

The semiconductor giant believes those two markets will be the prime driver of its growth in the years to come with increasing automation and prevalence of Internet of Things (IoT), where more and more devices will be connected to the internet.

All smart technology need semiconductors to function, and the company has the ability and technical know-how to efficiently meet the increasing demand for chips.

TI Customer Concentration Is Fragmented

It also stands to benefit from cars requiring more chips for their infotainment and driverless systems. To put it in perspective, reports suggest that automotive electronics is expected to be the fastest-growing market in the semiconductor industry, accounting for around 12% of sales revenue by 2022.

Another very important factor to note here is that TI sells chips across the globe, but none of TI’s customers accounted for over 10% of its revenue last year. This keeps the chipmaker somewhat isolated from political and economic upheavals in different parts of the world.

For example, chip sales to Chinese tech giant Huawei (the world’s largest telco equipment company) were a meagre 2% of its total revenue in the third-quarter.

What it means is that it is less likely to be affected in comparison to its peers that have a larger exposure to Huawei, even if the new administration decides to stick with the ban imposed by the Trump administration in 2019. 

The company has been focusing on its transition to 300-millimeter wafers, which cuts production costs by about 40%, and roughly makes up 50% of its analog revenue, to obtain competitive advantage over its rivals that mostly manufacture 200-millimeter wafers. Also, 300-millimeter wafers offer better margins in comparison to 200-millimeter wafer chips.

Additionally, the company has more than 80,000 products in its mammoth portfolio, thus making it a one-stop destination for a large number of industries for their many different needs.

Also, its products enjoy long shelf life which leads to decreased R&D expenses. All these factors, along with a large and deep sales channel, help Texas Instruments produce affordable chips with very attractive margins.

Risks Of Investing In Texas Instruments Stock

Car makers across the globe have been forced to drastically cut down on productions because of shortage of chips.

There has been a supply glut because of high demand during the pandemic for semiconductors used in consumer products such as game consoles, smartphones and computers.

Germany’s Audi says there would be a delay in production of some of its high-end vehicles because of what CEO Markus Duesmann called a “massive” shortfall.

Modern cars are demanding more and more chips with the increasing amount of electronics being added to cars. In fact, electronic parts and components account for 40% of the cost of a new, internal combustion engine car.

And this is one major risk that the chipmaker faces. In fact, this can cut both ways for a huge chipmaker like TXN.

First, there is concern that chip shortage has spooked automobile companies that, in turn, are ordering more chips now to ensure that they do not find themselves in the same bind in the future. This has some analysts worried that the company’s orders are artificially high as buyers are hoarding more components now to ward off the threat of a similar supply shortage in the foreseeable future.

Others worry whether the company has sufficient supply to meet the heightened demand.

Moreover, the company’s automotive business is moving at a faster pace than there is actual demand for vehicles in the market.

Analysts, as such, expect a slowdown of orders around the middle of the year. Also, the stock has been trading close to its all-time high, and the high valuation could be a deterrent for some investors at this point of time.

On the positive side, the company enjoys competitive advantages in manufacturing and technology, with its own manufacturing, providing about 80% of its needs.

While its competitors, citing supply constraints, are thinking about raising prices, TXN has categorically denied harboring any such thoughts, which puts it in a much stronger position than its peers.

Also, because of its solid inventory strategy, the company has enough inventory and production in place to meet its financial targets.

Texas Instruments Competes Against Titans

TI has a massive product portfolio of more than 80,000 products. The competition really depends on which products you are most interested in.

However, here we look at its competitors in the semiconductor industry, including NVIDIA [NVDA], Intel [INTC], NXP Semiconductors [NXPI], Broadcom [AVGO], Qualcomm [QCOM], Micron Technology [MU], Analog Devices [ADI], Skyworks Solutions [SWKS] and Microchip Technology [MCHP], to name a few.

NVIDIA

The company known for high-performance graphics processing units and parallel processing technology has evolved over the last few years, with its sophisticated GPUs and chips defining the next era of computing. 

As a GPU pioneer, NVIDIA has enjoyed a distinct advantage over its peers when it comes to designing semiconductors for the AI industry.

The San Jose, Calif.-based company has been expanding its technology beyond GPUs as well.

Whether it is corporate workstations and data centers, self-driving cars, drones, supercomputing, cloud computing and autonomous robots, the company has been quick to move beyond its traditional strength of gaming, and into new markets at a swift pace.

It completed its acquisition of data-center networking and connectivity hardware company Mellanox in early 2020 for $6.9 billion.  It also announced its decision to acquire U.K.-based Arm Holdings from Japanese investment firm Softbank in a transaction valued at $40 billion, a deal that would give it a significant foothold in the mobile chip industry.

The chipmaker seems to start from where it left off in 2020, with its share price up more than 14% in the first few weeks of the new year. Analysts expect NVIDIA to deliver $2.80 per share in earnings on revenue of $4.82 billion in its fiscal 2021 fourth quarter, higher than their initial expectations of $2.54 EPS on $4.42 billion in revenue.

NXP

NXP is a specialist in high-performance, mixed-signal chips for a number of industries, including 5G mobile networks, and mobile payment, but the auto industry is by far its largest end market.

Even amidst a global pandemic in 2020, where automobile manufacturing suffered a serious setback, auto sales accounted for well over 40% of NXP’s total revenue.

The company’s revenue suffered a decline of 7% year over year through the first nine months of 2020.

However, the company is fast springing back to its feet, as the economy opens up, and auto manufacturers demand more of NXP’s tech for everything, ranging from advanced driver assist systems (ADAS) for increased safety and vehicle autonomy to infotainment and electric vehicle powertrain management. 

The Dutch company has prime interest in electric and autonomous vehicle technology and, as such, is strongly positioned to gain market share in both the auto and mobile payment markets in 2021, as the world moves towards smarter manufacturing and automotive electrification.

Cash and equivalents totaled $3.57 billion and total debt was $9.36 billion at the end of September 2020.  Analysts are forecasting 12% revenue growth and 31% EPS growth in 2021 for the semiconductor company.

Texas Instruments’ stock currently trades for a premium to NXP Semiconductors’, but the Dallas-based semiconductor giant is an old warhorse boasting of efficient production and big profit margins.

While both companies are poised to benefit from the global auto industry rebound and vehicle technology and connectivity growth, TI has a more robust balance sheet to work with. 

A proven leader in chip making, TI looks a stronger bet at this juncture with its dividends, share repurchase program, and solid investment in R&D. 

Is Texas Instruments Stock A Buy? The Bottom Line

Amidst an escalating trade war with China and a global pandemic in 2020, TXN stock has stayed resilient. It should not come as a surprise though, as the semiconductor veteran has been around since 1930, successfully surviving several economic downturns and industry cycles which, in turn, attests to its staying power.

Its expertise, state-of-the-art manufacturing processes, extensive product breadth and a terrific capital allocation record has allowed it to build sustainable competitive advantage and receive more traffic in comparison to its competitors.

To top it all, the company has been continuously shifting from wireless chips and personal electronics to the analog and embedded segments, two sectors poised for robust growth with industrial and automotive end markets looking for silicon chips capable of turning temperature, sound, speed and light into electric signals that the modern computing systems can recognize and process.

Embedded and analog chips constituted 50% of the portfolio in 2008, whereas they make up around 90% of the portfolio today.

The semiconductor giant is known for its intensive focus in research and development of new chip designs. The company boasts of best-in-class manufacturing operations with an enviable track record of getting more competent with the passage of time.

Additionally, the company is renowned for its excellent capital allocation with unwavering commitment towards returning most of its free cash flow to investors via share buybacks and dividends. It has continuously increased its dividend for the past 17-years, and has reduced its share count by nearly 50% over the past 16 years.

The company is all set for a stronger 2021, as semiconductor stocks stand to benefit from sheer size of the transformative digital wave with computing, manufacturing, automotive and telecommunications sectors undergoing massive restructuring with new digital technologies.

All in all, Texas Instruments shines with a high free cash flow margin, wide product portfolio, excellent dividend yield and its focus on new technologies with potential for high return makes, even though it’s slightly overpriced.

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The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.