Texas Instruments Inc. (TXN) is in the semiconductor industry. The firm designs and manufacturers its semiconductor chips. Recently, management announced its guidance for the fourth quarter of 2013. Revenue is expected to come in between $2.92 and $3.04 billion with EPS between $0.44 and $0.48. Revenues are expected to be slightly down to up relative to the year-ago quarter, which included a $363M restricting charge.
With that said, since the last report, I changed the way that I view Texas Instruments. Specifically, I decomposed the required rate of return, which resulted in a lower cost of equity. I decided that the capital asset pricing model is prone to too many mis-pricings of risk. I now favor a discount rate based on the fundamentals of the company adjusted for economic circumstances and risks. Thus, the cost of equity decreased and the intrinsic value of TI increased to $50.96; I have more confidence in this model of pricing securities than in the capital asset pricing model. I truly apologize for any inconvenience.
TI remains a relatively stable, profitable company in a mature, fragmented industry. In an era of uncertainty, TI's business provides excellent visibility to investors. Consequently, I'm bullish on TI with an intrinsic value estimate of $50.96 and a distribution level of $67.94.
- At the International Consumer Electronics Show, TI DLP Products is showcasing more than 30 new products and applications enabled by the family of DLP Pico chipsets. One of the showcases includes phones and tablets that can project images 60 inches wide.
- TI acquired a building in the Chengdu Hi-Tech Zone from UTAC Chengdu Ltd.
- TI announced that it is releasing the new Delfino 32-bit F2837xD microcontroller.
- The new MSP430TCH5E haptics-enabled microcontrollers allow users to add vibrational feedback to all capacitive touch buttons, sliders and wheels on mobile computing and gaming devices, smart TV remotes, cameras, printers, industrial control panels, point-of-sale terminals and toys.
- The company improved the implementation of home or portable streaming audio applications.
Texas Instruments designs and makes semiconductors for electronics designers and manufacturers all over the world. There are two reportable segments: Analog and Embedded Processing. Analog consists of the following product lines: High Volume Analog & Logic, Power Management, High Performance Analog, and Silicon Valley Analog. Embedded Processing consists of the Processors and Microcontrollers and Connectivity product lines.
Analog is the company's principal operating segment from a revenues and operating profit perspective. The combination of the Analog, Embedded Processing, and Other operating segments has historically produced a relative stable result from a financial performance perspective.
In terms of liquidity, the cash ratio was 1.32 at the end of the September quarter. Net working capital was $5.38 billion. Net debt was $1.57 billion. The financial leverage ratio was 1.74. Lastly, trailing twelve months EBITDA/net interest expense was 62.4. Texas Instruments has room to increase leverage.
Of the three companies, Texas Instruments is the largest by revenues and Analog Devices is the smallest. But Analog Devices is the most profitable because it has a higher gross margin. STMicroelectronics is the least profitable as it has the lowest gross margin, but it should become more profitable once it completes its exit of STE, its joint venture with Ericsson.
Overall, this is a low growth industry, with growth being in the low-single digits. The 10-year average revenue growth rate is the best comparison. Using this metric, Analog Devices has the highest growth rate at 4.69% and STMicroelectronics has the lowest growth rate at 3%. Also, Analog Devices wins in the most important category, EPS growth.
A microcontroller is a small computer on a single integrated circuit containing a processor core, memory, and programmable input/output peripherals. Microcontrollers are designed for embedded applications. They are used in automatically controlled products and devices, such as automobile engine control systems, implantable medical devices, remote controls, office machines, appliances, power tools, and toys. Many of them are suited for long lasting battery applications while others act more like digital signal processors, with higher clock speeds and power consumption.
Simply put, if you live in modern society, you use products containing microcontrollers. The vast array of applications for the technology leads to a relatively fragmented industry. Consequently, firms lack pricing power.
Some of the key competitors are Toshiba (OTCPK:TOSYY), Infineon (OTCQX:IFNNY), Microchip Technology PLX, NXP Semiconductors (NXPI), STMicroelectronics, Atmel (ATML), and Cypress Semiconductors (CY). The architectures differ amongst firms.
- The share price is likely to remain volatile and investors could lose a portion or all of their investment.
- Investors should judge the suitability of an investment in Texas Instruments in light of their own unique circumstances.
- This section does not contain all risks related to an investment in Texas Instruments.
- A decline the global economic growth rate and/or a decline in the pace of economic growth in the United States could adversely impact the results of operations and the share price.
- Cyclicality in the semiconductor market may affect the performance.
- The technology industry is characterized by rapid technological change, which could materially adversely impact the results of operations.
- Competition in product development and pricing could adversely impact performance.
- Incorrect forecasts of customer demand could adversely impact the results of operations.
- Higher interest rates may reduce demand for Texas Instrument's offerings and negatively impact the results of operations and the share price.
Texas Instruments is relatively stable business with high profit margins. Even though the growth rate is relatively low, I think the company should trade at a premium to the market. And it does. Texas Instruments is trading at 4.3 times book value and 25.3 times earnings. It is more expensive than the market, but you pay a premium for visibility and profitability.
Accounting for the growth rate, stability, and profitability, I derive an intrinsic value of $50.96. This means that TI has another 18% to go before it reaches my intrinsic value estimate. There isn't much uncertainty in this intrinsic value estimate. I would look to sell at $67.94 and accumulate at the current share price or lower. The $50.96 level could be approximately 30 times earnings and 5 times book value, if the share price opened there tomorrow.