Texas Instruments (TXN) is a cyclical company that benefits from expansionary monetary policy. Those benefits can be seen in an increasing share price that has outperformed the market year-to-date and over the last year. Typically, TI performs roughly inline with the market.
It is that outperformance that has led common equity shares of the company to be overvalued. The market seems to be ignoring the weakness in the company's underlying business and the unwinding of the Wireless segment.
That said, I'm bullish on the future of Analog and Embedded Processing, just not at these prices. If I can get some shares in the $28-$34 range, I will attempt to generate a return on investment from a company with a return on equity higher than its cost of equity.
Texas Instruments is in a product refresh cycle, which could boost future revenues.
Texas Instruments announced the SimpleLink" Sub-1 GHz CC1200 transceiver, an extension to TI's RF performance line family. With leading range, co-existence and data rates up to 1Mbps, the CC1200 is aimed at Sub-1 GHz wireless connectivity for Advanced Metering Infrastructure and Home Area Networks in the smart grid, home and building automation, and alarm and security system applications. The CC1200 has a fairly large target market.
Texas Instruments expanded its FPD-Link III automotive-grade SerDes family with the DS90UH927Q-Q1 serializer and DS90UH928Q-Q1 deserializer, which deliver uncompressed high-definition digital video and audio to touchscreen LCD panels in a vehicle's central information display and rear passenger seats.
The company introduced the industry's smallest and most accurate Li-Ion battery fuel gauge integrated circuit, the bq27421, which boosts battery run-time in portable medical devices, such as wearable health monitors, and industrial devices like inventory scanners and portable emergency lights and other consumer electronics.
TI introduced two power management chipsets with the patented new "MaxLife" fast-charge technology, which allows consumers to charge single-cell Li-Ion batteries faster and experience longer battery life. The improvements will lessen consumers' frustrations with mobile battery life and charge times.
Texas Instruments has four main operating segments: Analog, Embedded Processing, Wireless and Other. The key thing to note is that the wireless segment is being unwound. That complicates the analysis. Two questions are going to have to be answered. How is the unwinding of the wireless segment going to impact financial performance? What will the company look like after the segment is unwound?
Excluding the Wireless segment, the consolidated company revenue grew 2% in 2011 and 2012, which was mainly attributable to the strong revenue growth of the Analog segment. The consolidated company's operating margins are shrinking as the operating margins of the three segments contract.
Given the unwinding of the Wireless segment, I will just present full-year forecasts for the segments instead of full-year and second-quarter forecasts. I think the Analog segment's revenue will be flat compared to last year at roughly $6.95 billion. The Embedded Processing segment's revenue may increase to about $2.5 billion. The Other segment may report revenue that is roughly flat at $2.5 billion. That said, I'm forecasting operating margins to continue to contract.
The revenue performance is modestly bullish for the valuations, but the margin contraction is bearish for the valuations.
Consolidated Forecast and Valuations
In the second quarter, I am looking for revenue in the $2.6 billion to $2.88 billion range with operating income in the $260 million to $420 million range and net income in the $234 million to $392 million range. Revenue last year in the second quarter was $3.34 billion and revenue in the first quarter of 2013 was $2.89 billion. I am expecting revenue to decline as the Wireless unit continues to unwind. Management guided around the $3 billion mark. So, we could see $2.9 billion to $3.1 billion of revenue.
For the full year, I think we are looking at revenue in the $10.8 billion to $12.3 billion range with operating income in the $1.08 billion to $1.85 billion range and net income in the $972 million to $1.72 billion range. The margins for this company are not stable; thus, the operating income and net income are more uncertain. For comparison purposes, 2012 revenue was $12.83 billion. Operating income was $1.97 billion and net income was $1.76 billion. I am expecting negative growth in the current year.
The financial performance should act as a headwind to valuations.
|TXN||S&P 500||TXN 5Y Avg*|
|Dividend Yield %||2.3||2.2||2.0|
*Price/Cash Flow uses 3-year average.
On a time series basis, TI is overvalued. Relative to its five-year averages and the S&P 500, TI is overvalued. Consequently, I find TI to be overvalued.
So, TI is overvalued and the financial performance should act as a headwind to multiple expansion.
Return on Equity vs. Cost of Equity And Share Price Forecast
In terms of the return on equity versus the cost of equity, TI should create wealth for investors. I estimate the cost of equity at between 6% and 8% and the return on equity is typically north of 15%.
TI is still an excellent company that is in the process of restructuring. So, I will model a top at the $40 level to find potential entry levels. In doing that, I find that the potential entry zone is between $28 and $34.