-Texas Instruments (TXN) is a leading semiconductor company focusing primarily on the areas of wireless, analog, and embedded systems.
-Company revenue, earnings, and cash-flow growth have been negative between 2004 and 2009, but have picked up for the trailing-twelve-month period.
-Dividend yield: 1.75%
-Five-year dividend growth: 35%
-The balance sheet is spectacular with no debt and plenty of cash.
-With a changing and highly-focused strategy based on analog circuits, embedded circuits, and wireless systems, and a P/E of 12.5, I find Texas Instruments to be attractively valued at the current price.
Texas Instruments (NASDAQ: TXN) is one of the leading worldwide semiconductor companies. The company was originally founded in 1930 as Geophysical Service Incorporated, and later became incorporated as Texas Instruments in 1947. Headquartered in Dallas, Texas, the company is often referred to as “TI” and has more than 27,000 employees. The company is well known to the public for its line of calculators, but the company derives most of its revenues and profits from other businesses.
Texas Instruments has issued more than 37,000 patents so far, including more than 1,100 in 2009 alone. The company has continued to invest during this recession, making smart acquisitions, expanding the sales force, and expanding manufacturing capability. In addition, the company has grown its dividend over the last several years and has repurchased shares in every quarter of 2009.
2009 Revenue Breakdown
Revenue, Earnings, Cash Flow, and Metrics
Revenue, Earnings, and Cash Flow have experienced declines since 2006, but the trailing-twelve-month period has shown a fairly strong rebound.
Texas Instruments reported declining revenue between 2006 and 2009. After the economic rebound, the trailing-twelve-month revenue for the company is up to nearly $13.5 billion.
Before this 2006-2009 slump for the company, Texas Instruments had strong growth. The company grew revenue by 12% annually between 2001 and 2006.
Earnings growth has also been negative since 2006, and the total period from 2004 to 2009 has therefore seen negative growth. Trailing-twelve-month earnings, however, have increased back up to over $2.9 billion, and if that number is used, earnings growth over this period has been reasonable.
Operating Cash Flow Growth
Cash flow for 2009 was lower than 2004, so that five-year period has experienced negative growth, but cash flow for the trailing-twelve-months has shown a rebound.
Texas Instruments has a net profit margin of 21%. This is higher than National Semiconductor, Maxim, and Broadcom, but lower than Intel, Linear Technology, and Analog Devices. Return on Equity (ROE) is 24%.
The P/E ratio of the stock is 12.5 and the P/B ratio is 3.6.
Texas Instruments has not long been a solid dividend payer, but under the leadership of CEO Rich Templeton, the company has become increasingly shareholder friendly. The company currently yields 1.75% with a payout ratio of less than 25%.
Texas Instruments has more than quadrupled its dividend over the past five years. The dividend has grown by an average of 35% annually. More recent growth, after this initial high increase, has been a more sustainable 9% or so.
In addition to dividends, the company returns value to shareholders by means of share repurchases. Between 2006 and 2009, the company had a total net repurchase of over $11 billion worth of TXN stock, which is a third of the current market capitalization. The company’s repurchases, however, have been rather poorly timed. Huge repurchases occurred during the stock price peak during 2005-2007, and fewer repurchases occurred during the market lows of 2008 and 2009. This has resulted in a lot of wasted shareholder value. The company would have done better to hold cash until a more appropriate repurchase time, or else pay a special dividend during those highly-valued stock years.
Recently, Texas Instruments announced a large repurchase authorization of up to $7.5 billion. I’m in favor of this repurchase, as the stock price is now at an attractive valuation. As a cyclical company, Texas Instruments has to keep its dividend payout fairly low so that it does not have to cut its dividend during recessions.
Texas Instruments, like many tech companies, has a magnificent balance sheet. The company has absolutely no short-term or long-term debt, so the total debt/equity ratio is 0. The current ratio for the company is 3.5, which is quite high. This company has a balance sheet strong enough to deal with most economic situations, and can be flexible to allow TI to take opportunities as management sees fit.
Tech companies have been out of favor since the tech crash, and as a result, their sky-high valuations have become far more reasonable over the past decade. Companies like Texas Instruments now have very attractive valuations and have become increasingly shareholder friendly. I believe that many investors are looking at the past, but the returns will be generated from the future, and many of these value-tech companies like Texas Instruments are well-positioned to provide solid shareholder returns going forward.
Texas Instruments is now focusing growth on three key areas: Wireless, Analog, and Embedded.
Analog is a large, profitable, and highly fragmented market. This includes data converters, amplifiers, interfaces, power management, and more. Texas Instruments maintains the leading market share at only 13%, and the total market is estimated to be $32 billion. Analog systems are less cutting-edge than some other areas of semiconductors and therefore require less capital expenditure and have longer product life-cycles, but typically involve substantial difficulty and human design efforts. The result is that analog systems usually involve high profit margins. Texas Instruments recently acquired CICLON Semiconductor to increase their analog business.
Focusing on embedded systems is a great strategy in my opinion. A company that makes embedded systems can develop a decent economic advantage in the form of switching costs. Customers write embedded code specifically for Texas Instruments products, and so will tend to stick with that system rather than eventually deciding to change their code to work on another chip, even through multiple product life-cycles. With over 11% of the market, Texas Insruments currently has the #2 market share in this area. Texas Instruments recently acquired Luminary Micro to increase their embedded business.
Texas Instruments produces a variety of wireless products ranging from baseband chips to applications processors. The company, due to identifying the baseband market as having low growth and reduced barriers to entry, is currently discontinuing its development of baseband chips and expects virtually all of its baseband revenue to cease by the end of 2012 (and thereby stifling company growth over this period to some extent). Instead, the company is focusing on applications processors and connectivity products, which are necessary in the growing smart-phone market.
Sales and Other
Texas Instruments has increased its sales force in places like China, India, and Eastern Europe. Historically, Texas Instruments would mostly interface with distributors which would then sell their products. The company is increasingly focusing on growing its personal sales force. By forming relationships with their customers, the company is attempting to increase per-customer sales. When Texas Instruments sales personnel become more familiar with their customers (including such things as taking facility tours and giving presentations), they can see which needs can be met by Texas Instruments and therefore grow their share of that customer’s purchases.
And of course, Texas Instruments produces a large line of calculators, ranging from fairly simple calculators through advanced graphing calculators. In fact, I use a TI calculator when I develop all of my stock reports. In addition, the company derives some revenue from royalties and some other, smaller lines of semiconductor devices.
In addition to all of these areas listed, Texas Instruments sees further opportunity. With increasingly power-efficient chips, the semiconductor industry is innovating new places to put chips. Texas Instruments sees great opportunity with health care, energy efficiency, and personal safety.
In my opinion, the focusing by Texas Instruments on a few key areas should be good news for shareholders. The company has been investing in new business directly related to its key competencies and divesting businesses that do not match up with them. Although Texas Instruments has among the top market share of the businesses it is involved in, the market is very fractured, and so the company has plenty of room to grow in any of its businesses as shown by the numbers above.
A primary strategy, according to CEO Rich Templeton in a recent tech conference, will be to continue to make these smaller types of acquisitions in the fields that they are focusing on that make Texas Instruments better rather than simply bigger. Templeton has also stated that he’s looking primarily at top-line growth and expects that this will be able to drive bottom-line growth in the long-term.
In addition, the company has been investing heavily in manufacturing capacity during this downturn.
If successful, all of this will allow the company to grow organically by becoming a better, stronger, more focused business with a powerful sales force.
The semiconductor industry is highly competitive and cyclical. Technical obsolescence is a constant threat to tech companies. A company involved with complex technology must continually reinvest to keep its products on the cutting edge. A few missteps in a row can quickly cause huge problems for this type of business. In addition, developing an economic moat is difficult in this business, as semiconductor chips are generally regarded as a commodity product. The brand matters less than cost and performance.
Conclusion and Valuation
Texas Instruments is focusing on analog systems, embedded systems, wireless systems for smart-phones and other devices, and increasing its sales presence in developed and developing markets. The company is focusing on tried-and-true profitable tech segments that have long product lifecycles and reasonable economic moats, while also keeping itself as a key player in the growing smart-phone market. Along the way, it’s growing its dividend and returning value to shareholders in the form of share repurchases. The balance sheet is very strong, the valuation is quite low, and the CEO seems to be making excellent strategic long-term decisions.
Perhaps just as importantly, an investment in a company like Texas Instruments is less of a bet on any single technology, and more of a bet on the future of technology in general. Texas Instruments is an enabler of technology for a variety of other businesses as a key provider of several semiconductor products. For those looking to get exposure to tech while keeping risk at a moderate level, adding to a portfolio companies like Texas Instruments can provide a solution. Their products have fairly long life-cycles (especially in the high-performance analog segment and embedded segment) and their manufacturing facilities also have longer lifespans.
As of this writing, I own shares of TXN, but none of the other companies mentioned.
You can see my full list of individual holdings here.
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