Streetwise for Sunday, May 31, 2019

A key player in the arena of Analog and Embedded Processing is Texas Instrument (TXN). Note: An embedded system is one with a dedicated function within a larger mechanical or electrical system. Analog refers to a continuously variable signal (current or voltage), in contrast to digital where signals (voltages) are basically two levels representing a zero or a one.

Texas Instruments is currently the world’s largest producer of analog chips, focusing its strategy on the industrial and automotive markets. This makes sense because those markets provide great diversity and longevity and Texas Instruments is strategically well positioned in both.

When I last wrote about the company a year ago, my earnings estimate for 2018 was $5.40 per share, with a forecasted 12-month share price of $122, for a 10 percent capital gain. So how did the company do? Earnings came in at $5.59 per share, well above my estimate but the shares recently traded at about $103.

Moreover, in the past month the company’s shares are down nearly 10%. So, the question is whether this company should be on your watch list. To answer that question, you might want to research in more detail the following financial data.

Texas Instrument posted first quarter 2019 earnings of $1.26 per share. If you exclude a discreet tax benefit of 4 cents per share, the adjusted earnings were $1.22 per share. However, the reported figure decreased 6.7% year over year and 0.8% on a sequential basis.

The company delivered revenues of $3.59 billion and was within the company’s guided range of $3.34-$3.62 billion. However, the figure was down 5% from the year-ago quarter and 3.3% sequentially.

Decline in demand in the reported quarter affected both the company’s Analog and Embedded Processing businesses. Nonetheless, the company’s focus on innovation is evident from its growing research and development (R&D) spending. 

R&D spending continues to be a key catalyst. Furthermore, the company remains confident about its product strength, efficient manufacturing strategies and optimized capital allocation in growth areas. 

And the company continues to increase investments in the automotive and industrial markets which are expected to yield respectable returns.

While softness in demand affected the company’s performance in the industrial and automotive market and its presence in personal electronics, the company performed better than expected in the communications equipment market in the first quarter, thanks to products required for 5G technology. Revenues in this segment were up 30% from the year-ago quarter.

The company posted a gross margin of 62.9%, down 1.7% from a year-ago. Selling, general and administrative (SG&A) and R&D expenses were $414 million and $389 million, respectively. While SG&A fell 4.4%, R&D increased 1% on a year-over-year basis. Operating margin was 38.4%, contracting 2.4% from the prior year quarter.

As of Mar 31, cash and short-term investments were $4.1 billion, down from $4.2 billion as of Dec 31, 2018, while long-term debt was $5.1 billion, up from $4.3 billion in the prior quarter.

The company generated $1.12 billion of cash from operations, down from $2.14 billion in the previous quarter. Capital investment was $251 million in the first quarter and free cash flow came in at $856 million.

Looking ahead to the second quarter, the company expects revenues between $3.46 billion and $3.74 billion. Earnings are expected to be between $1.12 and $1.32 per share. The guidance includes an estimated $10 million discrete tax benefit.

So, what about the all-important dividend? In the past year, Texas Instruments paid out 49% of its profit as dividends. This is medium payout level that leaves enough capital in the business to fund opportunities and was a conservative 43% of last year’s free cash flow. Meanwhile, dividends per share have grown at approximately 21.6% per year over the past 10 years.

The intrinsic value of the shares using a free cash flow to the firm discounted cash flow model is $128, versus a recent share price of 103. My earnings estimate for 2019 is $5.65 per share, with a forecasted 12-month share price of $120, for a 16.5% capital gain, plus a 2.61% dividend yield.

Lauren Rudd is a financial writer and columnist. You can write to him at LVERudd@aol.com. Phone calls accepted between 9 AM and 3 PM at (941) 706-3449. For back columns please go to www.RuddReport.com.