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Michael Le
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I am a Economics Student at Portland State University. I am also the President and Market Research Analyst of the PDX Investment Club which has changed to the PDX Financial Literacy Group as of 7/2014. I am interested in Heterodox based crisis theory, and market/economic cycles. I hope to... More
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  • Texas Instrument: A Long-Term Income Stock

    Summary

    • TXN faced a sell-off of over 7% on friday and is sitting at a very attractive discount.
    • With high gross and operating margins, profitability is not an issue.
    • Falling more than 9% since last week, TXN remains more attractive than ever.

    On Friday, when all microchip companies were selling off, Texas Instrument (NASDAQ:TXN), which a solid, well-known and established broad-based semiconductor manufacturer sold off almost 8%. I believe that with this depreciation in stock price, value was created, and TXN now looks more attractive than ever given they are backed not only with great company fundamentals, but a value creator as well.

    Company Overview

    Texas Instrument was founded in 1930 and specializes in the design, manufacturing, and selling of semiconductors, which mostly are focused on analog, embedded processing, and wireless. Texas Instrument is the second largest broad-based semiconductor manufacturer by market cap.

    Texas instrument on the retail consumer front is most known for their TI-calculators which are used in many educational environments, and are constantly being cycled and replaced to keep up-to-date with the ever changing world of mathematical, engineering, and science education.

    Furthermore, as of recently, Texas Instrument has been working on atransition to an all-analog based company of which more profitability and more benefits to shareholders are possible.

    Value Creator

    Near the end of September Texas Instrument announced that it would be raising its dividend to $0.34/share/quarter. This equates to an annual dividend of $1.32 which, at the previous closing price of $42.74, is a 3.09% annual dividend yield from the day they announced the increase. Currently, for this year, the annual dividend yield is sitting at 2.81% as of Friday's close, which is just 5 bps shy of their 10-year dividend yield high of 2.86%. With this, Texas Instrument has now raised their dividends for 11 consecutive years.

    On top of this Texas Instrument has been buying back a large amount of shares in recent years. This creates more value per shareholder and could lead to further increases in dividends. The buy back ratio as stated by Gurufocus is higher than 93% of 585 global semiconductor companies. As shown from the graph below, Texas Instrument has been increasing buybacks on average for the past five-years at a 20.82% growth-rate. With a price-to-cash ratio of over 16, I wouldn't be surprised if more buybacks were to occur soon. With increased dividends and buybacks, Its no surprise that Texas Instrument was recently named 'Top Dividend Stock' within the Nasdaq 100.

    Fundamental Overview

    There are three things I look for when examining a prospective company to invest in: revenue growth, profitability, and liquidity/solvency.

    With concerns to revenue growth, I would like to see continuous revenue growth for the past 5 years. With this five year checklist, TXN is displaying some weakness with overall revenue decreasing since 2010, of which is mostly concentrated in their 'other' sector.

    (click to enlarge)

    Overall, Texas Instrument's short-term revenue growth (5-years) has outpaced it's longer term (20-years) average growth of 2.05% by 27 bps.

    Revenue is only part of the bigger picture of which leads us to look at profitability.

    Comparing revenue growth to net income we can assume that Texas Instrument, being a big company,is experiencing diseconomies to scale, or simply stated, an increased cost per unit produced; therefore, there is a smaller increase in net income for every unit increase in revenue. This can be implied due to the 5-year trendline for revenue at 2.32%, while the 5-year net-income trendline is at 1.66%.

    Overall conclusion on revenue growth would be the current performance relative to the historical growth, Texas Instrument's revenue and net income is staggering and hasn't really experienced impressive growth since around 2010. As an income investor this is something that would keep me cautious about the company over the long-run, but with simple financial engineering, Texas Instrument is creating more value is being created than bad news.

    Next, we look at profitability.

    (click to enlarge)

    Based on historical annual reports, we can see that from a slump in 2012, profit margins and profitability ratios greatly improved in 2013.

    What I would like to see is that TXN can continue this widening margin in FY2014, and maybe even see values closer to that of 2010. To do this, we'll examine identical metrics for from Q2 of FY2013 to Q2 of FY2014.

    (click to enlarge)

    We can see that as of Q2, Texas Instrument has done a fairly good job at increasing margins yoy. Furthermore, profitability ratios are on average greater than FY2013, and may continue on this path into the end of this year.

    I conclude that with concerns to profitability, Texas instrument is not lacking, and could even produce better margins this year despite warnings from Microchip that it is now a downcycle for semiconductor based companies.

    The last fundamental measure I will look at is liquidity and solvency. This is extremely important for any company simply due to the fact that cash is king, and companies that can convert assets to cash easily may be able to seize opportunities that illiquid companies may have a hard time doing. Furthermore, solvency is a big issue because a company that is insolvent may not have the cash readily available to spend since most of it will be tied up in paying off liabilities or interest expense.

    With regards to liquidity, I see no reason for concern as liquidity ratios improved in 2013, and have improved significantly since 2011. Texas Instrument is in no liquidity stress as of recently, and should fair well throughout this year.

    (click to enlarge)

    Improvement in solvency ratios prove to make Texas Instrument a more attractive company because with less debt, Texas Instrument won't be as sensitive to interest rate swings as high-debt low solvency companies.

    (click to enlarge)

    Conclusion

    I conclude by stating that Texas Instrument is a fundamentally sound company, offering income and value to investors that are invested for the long-term. Furthermore, with the recent sell off in semiconductor-based companies, Texas instrument is sitting at a discount and current prices could prove to be a great entry for income investors seeking a higher dividend yield.

    Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it. The author has no business relationship with any company whose stock is mentioned in this article

    Tags: TXN
    Oct 15 3:22 PM | Link | Comment!
  • Comcast: A Break In Support

    Comcast (NASDAQ:CMCSA) recently broke its 50 week moving average which is considered a major medium term support. Boxed is a range that Comcast may find resistance, and the line above the box shoes an area of minor resistance around 48.00.

    I would look for an entry between 42.50 and 45.00 at the lowest.

    I will pick up shares at 48.00 and use a married put strategy to limit downside loss and maybe even come out on top with a net gain, of which I can use profits to buy at a lower price.

    (click to enlarge)

    Tags: CMCSA
    Oct 15 2:25 PM | Link | Comment!
  • Markets In Motion, Stay In Motion

    Sure, the market is not an object, but we can look at it that way. For instance, lets look at the phrase: An object in motion stays in motion until some force acts against it. This force, in the markets that is can be anything from supply and demand to global economic recovery or better than expected economic data. Recently however, it hasn't been looking so bright. More than 79% of companies in the Russell 3000, the index that tracks the largest 3000 companies on the public market, has faced a decline in prices of 10% or more. Looking at it this way though, if your portfolio has had a decline less than 10%, you're doing fairly well compared to the majority of large companies within the 3000. All three major averages are down at least 4% from their mid-September highs as well. So, if you're doing better than a 4% decline, congratulations; you were either invested in some boom company, or sectors such as consumer goods and utilities. Shorting energy stocks should have faired well as well (I still see further sell-off in the energy sector for the remainder of the year, so if you're not shorting, there should be married puts with your long energy positions). Some individuals such as Tobey, a contributor for Forbes, sees this correction as an approach towards a cliff that drops into a bear market. As shown by Tobey, there is significant support at the ~1900-1903 level of which investors should strictly monitor the market and or hedge against a possible break-and-fall.

    MACD is showing signs of a correction in the near future, if not in the present.

    (click to enlarge)

    The weekly chart shows that the momentum of the recent sell off has been very strong, and could extend itself until the end of October. Also a sell off of 4-6% is by no means a bear market, but one should be prepared for something of that nature. Most likely I would look for currently sensitive sectors such as technology and energy. Hedge against losers, and sell winner when you think they've gone too high.

    Also, one should be reminded that the end of the year, particularly the 4th quarter is what some like to call "small-cap swoon". Small caps tend to underperform near the end of the year since a lot of fund managers tend to rotate out of their more risky (and volatile) positions in order to pick up less volatile and risky stocks or indexes. I would not be surprise if this 'correction' lasted another week or two, but I would be surprised if this broader market sell-off lasted until the end of the year.

    In the short term, I expect small-caps to face some more downward pressure, and oil stocks to do the same. I will most rotate funds into small caps and energy based stocks near the end of this year or early next year.

    Given that I'm a seasonality and macro-rotational investor as well, I'll expect the markets to do a lot better next year than this year since next year is apre-election year; however this has been an odd year, and next year may as well. Given all this I'll conclude this short rant on the market sell-off by saying that if the market were to correct (more than 10% fall in overall market price), then I would be even more confident in better market performance for 2015.

    (click to enlarge)

    On top of this we are facing lowered confidence from the IMF and IMFC with concerns to global growth and strength.

    With all this bad news and outlook, remember my friends, that you should begreedy when the market sells, and not hoard cash until everyone else jumps in first.

    Tags: SPY, XLE, IWM
    Oct 11 6:44 PM | Link | Comment!
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