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Texas Instruments Reports Normal Demand For Q3 As Industry Correction Begins

|About: Texas Instruments Inc. (TXN)

Summary

Microchip Technology reported a revenue miss in their recent results, which left investors scrambling to sell off stocks. The report stated that chip demand had declined.

Texas Instruments (NASDAQ:TXN) reported its third quarter earnings and outlined impressive increases in revenues and earnings, led primarily by the growth of its Analog and Embedded Processor segments.

The company management assured investors that demand remained normal during the quarter, and there was no concern of excess stock build up that could pose as problems in the future.

Yearly range for stock prices are $39.19-$49.77, while the 1 year target estimate for the stock comes in at $50. The dividend yield of the company is high at 2.91%.

Dip in share prices at the month’s start was the prime buying time. Investors would find this stock useful due to its history of strong dividend reports as well.

Texas Instruments (NYSE:TXN) reported strong financial results for the third quarter of 2014, on the back of which investor confidence, regarding the growth of microchip companies, has been restored. Not only did the financial result indicate that Texas Instruments is a healthy business and continues to grow, but also came as a sign of relief for investors who held on to their investments as chip stock prices plummeted following the miss of Microchip's revenues earlier during the month.

Chip demand slowdown

Microchip Technology Inc. registered the sharpest decline in its prices in more than six years, which lead to bearish trends for other chip stocks and the industry outlook as well. The company stated that their revenue miss was a result of the decline in demand from the Chinese market, which is traditionally the strongest market for the company. This revelation came as a shock to investors who believe that this trend is likely to impact other chip companies as well, causing a run on the stock as soon as the news was made public.

Texas Instruments financial results for Q3 2014

Texas Instruments exceptional results came as a reward to investors who had held onto the stock during the troubling times earlier this month. The earnings summary of the company indicated that it was able to grow revenues by 8% year on year. Revenues increased to $3.5 billion during the third quarter.

Operating profit of the company was nearly $1.2 billion, which is a 39% jump from the operating profit that was posted in the third quarter of the prior year. Net income of the company registered a 31% increase and was reported at $826 million. Earnings per share for the quarter were announced at 76 cents, which was 36% higher, year on year, and topped the consensus estimate of 71 cents.

An analysis of segment wise results of the company showed that the Analog and Embedded Processing segments continued to perform well during the quarter. The Analog segment reported an increase of 11% in revenues, while operating profits increased by 38% for the segment. Revenues and operating profit were reported at $2.1 billion and $802 million for the segment respectively. The operating profit for the segment grew as a result of the higher revenues that were registered by the company.

The Embedded Processing segment registered a 6% increase in its revenues, which were $711 million during the quarter, while operating profit for the segment was up by 37% and was $114 million. Operating profit for this segment increased as a result of the company's ability to control its operating expenses and also due to the higher gross profit.

As a percentage of revenue, gross margins were at their highest, coming in at 58.4% during the quarter. The margin was 3.5% higher annually, relative to the margins reported during the third quarter of the prior year. Research and development expenditure and selling, general and administration expenditures both declined as a percentage of revenue, while operating profit increased to 33.6% as a percentage of revenue.

Cash flow from operations of the company increased by 17%, and was $3.8 billion.

Total dividends paid out during the quarter were reported at $319 million, while the trailing 12 month amount was $1.3 billion, 19% higher. The company also returned value to shareholders in the form of share repurchases, which amounted to $670 million during the quarter.

Q4 outlook

Following the strong results that were posted for the third quarter, the company expects earnings per share of $0.64-$0.74, beating analyst consensus estimates of $0.63. Revenue expectations for the third quarter are $3.13-$3.39 billion, in line with consensus estimates.

What will the future hold?

Share prices for Texas Instruments have remained fairly stable during the past six months, except for the dip was witnessed earlier this month following the report by Microchip Technology Inc. That being said, investors who saw the dip as an opportunity to buy low and sell high, when prices fell as low as $41.93, should be very pleased with the way prices have recovered following the event.

Ever since the dip, share prices have been trending upwards. The yearly range for stock prices are $39.19-$49.77, while the 1 year target estimate for the stock comes in at $50. Investors might not be highly impressed with the one year target estimate, given that the shares are currently trading near the target. However, investors who are looking for a stock that returns value to its shareholders will find solace in the fact that Texas Instruments is ranked amongst the top 25 high dividend paying companies with a yield of 2.91%. Not only does the company have a strong history of reporting quarterly dividends, but dividend growth rates have also been high over the period of time.

The company has been able to maintain itself in the face of the challenge of a slowdown in demand faced by the industry, and most importantly, by its top rivals. Not only was the company able to post impressive earnings to show off its strong financial muscle, but was also able to restore investor confidence when it confirmed that demand levels for the quarter were normal and that the company did not have any concerns of excess build up of inventory that could pose problems later on. The results of the third quarter have confirmed that the company is immune to the downturn of the industry at the moment. The fact that analysts question how long it can stay immune from these effects is another matter altogether.

For investors, the recent earnings release has been able to allay some of the investor concerns following the correction that took place in the industry. For investors who are in search of a regular and substantial stream of income could opt for Texas Instrument's stocks at the moment.

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 (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.