ModernGraham Quarterly Valuation Of Texas Instruments Inc.

Mar.11.14 | About: Texas Instruments (TXN)

Benjamin Graham taught that Intelligent Investors must do a thorough fundamental analysis of investment opportunities to determine their intrinsic value and inherent risk. This is best done by utilizing a systematic approach to analysis that will provide investors with a sense of how a specific company compares to another company. By using the ModernGraham method one can review a company's historical accomplishments and determine an intrinsic value that can be compared across industries. What follows is a specific look at how Texas Instruments fares in the ModernGraham valuation model.

TXN Chart

TXN data by YCharts

Defensive Investor - must pass at least 6 of the following 7 tests: Score = 4/7

  1. Adequate Size of Enterprise - market capitalization of at least $2 billion - PASS
  2. Sufficiently Strong Financial Condition - current ratio greater than 2 - PASS
  3. Earnings Stability - positive earnings per share for at least 10 straight years - PASS
  4. Dividend Record - has paid a dividend for at least 10 straight years - PASS
  5. Earnings Growth - earnings per share has increased by at least 1/3 over the last 10 years using 3-year averages at beginning and end of period - FAIL
  6. Moderate PEmg ratio - PEmg is less than 20 - FAIL
  7. Moderate Price to Assets - PB ratio is less than 2.5 or PB x PEmg is less than 50 - FAIL

Enterprising Investor - must pass at least 4 of the following 5 tests or be suitable for a defensive investor: Score = 5/5

  1. Sufficiently Strong Financial Condition, Part 1 - current ratio greater than 1.5 - PASS
  2. Sufficiently Strong Financial Condition, Part 2 - Debt to Net Current Assets ratio less than 1.1 - PASS
  3. Earnings Stability - positive earnings per share for at least 5 years - PASS
  4. Dividend Record - currently pays a dividend - PASS
  5. Earnings growth - EPSmg greater than 5 years ago - PASS

Valuation Summary

Key Data:

Recent Price $45.69
MG Value $31.83
MG Opinion Overvalued
Value Based on 3% Growth $27.09
Value Based on 0% Growth $15.88
Market Implied Growth Rate 7.98%
Net Current Asset Value (NCAV) -$0.10
PEmg 24.46
Current Ratio 2.92
PB Ratio 4.58
Click to enlarge

Balance Sheet - 12/31/2013

Current Assets $8,019,000,000
Current Liabilities $2,747,000,000
Total Debt $4,158,000,000
Total Assets $18,938,000,000
Intangible Assets $6,703,000,000
Total Liabilities $8,131,000,000
Outstanding Shares 1,082,800,000
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Earnings Per Share

2013 $1.94
2012 $1.53
2011 $1.91
2010 $2.66
2009 $1.15
2008 $1.45
2007 $1.83
2006 $1.69
2005 $1.39
2004 $1.05
2003 $0.68
2002 -$0.27
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Earnings Per Share - ModernGraham

2013 $1.87
2012 $1.80
2011 $1.89
2010 $1.84
2009 $1.45
2008 $1.56
Click to enlarge

Dividend History

TXN Dividend Chart

TXN Dividend data by YCharts

Conclusion:

Texas Instruments should be on the watch list of any Enterprising Investor, as the company passes all of the requirements of the investor type. However, the company does not qualify for the Defensive Investor due to insufficient earnings growth over the ten-year period, and high PEmg and PB ratios. As a result, Enterprising Investors should feel comfortable proceeding with further research while Defensive Investors may wish to look into other opportunities such as through a review of 5 Outstanding Dow Components or 5 Low PEmg Companies for the Defensive Investor.

From a valuation perspective, the company appears to be overvalued at the present time, due to the low earnings growth. The company has only grown its EPSmg (normalized earnings) from $1.45 in 2009 to $1.87 for 2013, and this level of historically demonstrated growth does not support the market's implied estimate of 7.98% earnings growth. This leads the ModernGraham valuation model to return an estimate of intrinsic value that falls below the market price.

The next part of the analysis is up to individual investors, and requires discussion of the company's prospects. What do you think? What value would you put on Texas Instruments? Where do you see the company going in the future? Is there a company you like better?

Disclosure: The author did not hold a position in Texas Instruments (NASDAQ:TXN) or any of the other companies listed in this article at the time of publication and had no intention of changing that position within the next 72 hours.