The share price of Texas Instruments, Inc. (NASDAQ:TXN) continued to trade higher going from $39 per share up to $42.64 following my last report, as bears have lacked a catalyst to spark a wave of selling. The declines thus far have been short lived, but I continue to anticipate that a bear market of primary degree will occur in the foreseeable future. The question is "what will be the catalyst?"
The biggest risk in my opinion that Texas Instruments investors face is interest rate risk from Fed tapering. That's pretty much the discussion at the conferences I have attended. In terms of Texas Instruments as a business, it's a relatively stable business with not much industry competition, so I don't foresee any rapid changes occurring. So you have to look to the macro for a catalyst for a bear market decline.
I am going to go over some recent developments, the fundamentals, and the valuations.
With that said, the financial performance has been towards the lower end of my forecast. Valuations continue to be, in my opinion, excessive. I'll wait for a decline to roughly $30 per share before I purchase shares of Texas Instruments. I hope that you enjoy the report!
Texas Instruments introduced five new next-generation power management integrated circuits that efficiently acquire and manage microwatts (uW) to milliwatts ("MW") of power harvested from light, heat or mechanical energy sources.
With the new Texas Instruments 66AK2H14 device, developers designing high-performance compute systems now have access to a 10Gbps Ethernet switch-on-chip. The inclusion of the 10GigE switch, along with the other high-speed, on-chip interfaces, saves overall board space, reduces chip count and ultimately lowers system cost and power.
From an industry analysis perspective, the analog market was just shy of $39 billion in size and the embedded market was $17 billion in size last year, according to Dave Pahl, Texas Instruments' director of investor relations.
In analog, Texas Instruments is the market leader with about 17% share, and in embedded Texas Instruments is number two with about 14% of the market.
Customers do not have much, if any, bargaining power in the analog and embedded markets. But Texas Instruments doesn't have much pricing power. Given that market share does not move around a lot, overall I am bullish on the industry.
The top line has been pretty much flat, 4.34% growth, over the last 10 years with most of the growth attributable to the 2004 calendar year.
This year investors are looking for total revenue of about $12 .2 billion, which is in line with my previous estimate of roughly $12 to $13 billion of revenues.
Looking forward to 2014, I think we see similar results; this is a pretty stable business and management has pretty good visibility of demand. There could be some fluctuations of the gross margin and some of the operating expenses, but overall this is a relatively stable mid-single digits of growth company.
From a fundamentals perspective, I'm bullish on TI. The critical questions are about the valuations.
I view the dividend discount model and the multiplier model as being appropriate valuation tools for Texas Instruments' shares. After applying the models, I continue to think of Texas Instruments as being overvalued.
Between 2008 and 2012, the dividend increased at a roughly 15 percent pace. I think that is unsustainable; I think going forward we'll see the dividend increase at a roughly four percent pace. My reasons for thinking that the dividend will increase at a 4.34% pace are the current high payout ratio, the industry growth rate, and global nominal GDP growth; more specifically, I think the 10-year average revenue growth rate of 4.34% is a good measure of TI's growth rate going forward. Consequently, I will use 4.34% as my sustainable growth rate in the model, which is an upward revision of 34 basis points from the previous estimate.
Applying a range of estimates for growth and the discount rate, I get an intrinsic value ranging from $24.42 per share to just under $40 per share. Consequently, using this model, I view Texas Instruments as being overvalued.
(click to enlarge)Using the multiplier models, Texas Instruments is overvalued. Relative to its 5-year averages, TI is trading at a premium. The fundamentals of the business have not changed enough to justify the premium valuation. Relative to the S&P 500, TI is overvalued. The premium valuation could be partly attributable to the above average payout ratio. But I view growth as below average and risk as measured by beta as above average.
Paying 4 times book value and 25 times earnings is too steep of a price for me to pay. Consequently, including the other valuation metrics, I think TI is overvalued; I would accumulate shares closer to the $30 per share level.