Texas Instruments is the market leader in manufacturing analog and embedded processing chips. Analog chips are utilized in every electronic device, whereas embedded processors are employed in most. Therefore, Texas Instruments possesses the characteristics of a long-term compounder. In this analysis, I will investigate the company and make calculations to determine a suitable price for purchasing the stock.
This is not a financial advice. I am not a financial advisor and I only do these posts in order to do my own analysis and elaborate about my decisions, especially for my copiers and followers. If you consider investing in any of the ideas I present, you should do your own research or contact a professional financial advisor, as all investing comes with a risk of losing money. You are also more than welcome to copy me.
Since I have attended the workshop with Phil Town, I have decided to change the layout of my analyses a bit. I will do some more calculations and also briefly go through why the company has meaning to me. If you want to read more about how I evaluate a company, please go to "MY STRATEGY" on my website.
For full disclosure, I should mention that at the time of writing this analysis, I do not own shares in Texas Instruments or in any of their direct competitors. If you want to copy the portfolio or viewing the stocks I currently own, you can find instructions on how to do so here. I have no personal stake in Texas Instruments, so it should not be difficult to maintain an unbiased analysis. If you want to buy shares or fractional shares in Texas Instruments, you can do so through eToro. eToro is a highly user-friendly platform that allows you to get started on investing with as little as $100.
Texas Instruments was founded in 1951 and is headquartered in Dallas, Texas. They manufacture semiconductors that they sell to electronics designers and manufacturers worldwide. Texas Instruments has three financial segments: Analog (74% of the 2023 revenue), Embedded Processing (19% of the 2023 revenue), and Other, which includes DLP products and calculators (7% of the 2023 revenue). Texas Instruments operates in six different markets: Industrial (40% of the 2023 revenue), Automotive (34% of the 2023 revenue), Personal Electronics (15% of the 2023 revenue), Communications Equipment (5% of the 2023 revenue), Enterprise Systems (4% of the 2023 revenue), and Other (2% of the 2023 revenue). Texas Instruments has facilities in more than 30 countries and generates about 65% of its revenue outside of the United States. Texas Instruments has four competitive advantages. The first advantage lies in manufacturing and technology, which provides them with a competitive edge due to lower manufacturing costs and greater control over the supply chain. The second company has a broad portfolio, with over 80.000 products, which exceeds that of their competitors. The third factor is the reach of market channels. In 2023, 75% of their revenue came from direct sales. The fourth advantage is diverse and long-lived positions, resulting in less single-point dependency and longer returns on investments. With over 100.000 customers, their investments in manufacturing equipment make their business less capital-intensive, as manufacturing equipment and process technologies are typically used for 20 years or more. Being a market leader with four competitive advantages is what gives Texas Instruments a moat.
The CEO is Haviv Ilan. He joined Texas Instruments in 1999 and became the CEO on April 1, 2023. Prior to joining Texas Instruments, he held a position at Butterfly, a wireless start-up company in Israel that was acquired by Texas Instruments. Haviv Ilan has held several positions at Texas Instruments during his 24 years with the company, thus gaining vast experience in the industry. He has a bachelor's and master's degrees in electrical engineering from Tel Aviv University. Additionally, he holds an MBA from Northwestern University's Kellogg School of Management. When he was appointed as CEO, he was described as an exceptional leader with a proven track record of delivering results, an intense focus on innovation, and a passion for winning. As Haviv Ilan is new in his role, we cannot judge him as a CEO yet. However, I feel comfortable with him as a leader because he was handpicked by former CEO Rich Templeton and has vast experience in the company and in the industry. I am also reassured that Rich Templeton will remain on the Board of Directors. Nonetheless, only time will tell if Haviv Ilan is the right person for the job.
I believe that Texas Instruments has a strong moat. However, there are some uncertainties regarding the management. Now, let us investigate the numbers to determine if Texas Instruments meets our criteria for a strong competitive advantage. In case you want an explanation about what the numbers represent, you can refer to "MY STRATEGY" on the website.
The first number we will investigate is the return on invested capital, also known as ROIC. We require a 10-year history where all figures exceed 10% each year. The numbers are very impressive, as Texas Instruments has delivered a Return on Invested Capital (ROIC) above 10% in each year over the last ten years. Furthermore, it is impressive to see that they have consistently achieved a Return on Invested Capital (ROIC) above 30% from 2018 to 2022. However, the 2023 numbers are the lowest that Texas Instruments has reported since 2015, which is slightly concerning. However, the low numbers are due to macroeconomic factors that have affected sales of products that use Texas Instruments products, combined with high capital expenditures as Texas Instruments is investing for the future. Thus, I believe there is an explanation for the decrease, but I would like to see a higher Return on Invested Capital (ROIC) moving forward.
The following numbers represent the book value + dividend. In my previous format, this was referred to as the equity growth rate. It was the most important of the four growth rates I used in my analyses, which is why I will continue to use it in the future. As you are accustomed to seeing numbers in percentage form, I have decided to provide both the actual numbers and the year-over-year percentage growth. Texas Instruments' equity hasn't increased every year, but I am not worried about it. It is also nice to see that Texas Instruments has reached its highest level in the last three years, which hopefully bodes well for the future.
Finally, we will analyze the free cash flow. Free cash flow, in short, refers to the cash that a company generates after covering its operating expenses and capital expenditures. I use levered free cash flow margin because I believe that margins offer a better understanding of the numbers. Free cash flow yield refers to the amount of free cash flow per share that a company is expected to generate in relation to its market value per share. Texas Instruments believes that the most effective metric for shareholders to gauge their progress is the long-term growth of free cash flow per share. Thus, Texas Instruments has a clear strategy to maximize long-term free cash per share growth through three key elements: first, a robust business model that focuses on analog and embedded processing products and is structured around four sustainable competitive advantages; second, disciplined capital allocation to the most promising opportunities; and lastly, an emphasis on efficiency, aiming for increased output for every dollar spent. Hence, it is not surprising that Texas Instruments has delivered a positive free cash flow every year in the past ten years and a high levered free cash flow margin every year except for 2023. 2023 was a challenging year, and when combined with high capital expenditures, it is reflected in the numbers that Texas Instruments delivered. However, I believe that Texas Instruments will return to delivering high numbers within a couple of years. Therefore, I'm not overly concerned with the numbers.
Another important aspect to consider is the level of debt. It is crucial to determine whether a business has manageable debt that can be repaid within a period of 3 years. We do this by dividing the total long-term debt by earnings. Upon calculating using Texas Instruments, I found that the company has a debt-to-earnings ratio of 1,64 years. Therefore, debt is not a concern for me if I invest in Texas Instruments.
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Based on my findings thus far, I believe that Texas Instruments is an excellent company. However, no investment is without risk, and Texas Instruments also has its share of risks. One risk is macroeconomics. If we experience a prolonged recession, it is reasonable to expect that there will be a decline in Texas Instruments' end markets. Management has mentioned that they continue to see weakness in the various markets in which they operate. By the end of 2023, Texas Instruments reported that the industrial market had declined by mid-teens as they observed a growing weakness. The automotive market was down by mid-single digits after 3,5 years of very strong growth. Personal electronics were flat. The communications equipment was down by low single digits. While enterprise systems grew at a low single-digit rate. Management has mentioned that they believe they will continue to operate in a weak environment. China Exposure. Texas Instruments makes about 20% of its revenue in China. If the deteriorating relationship between the United States and China continues, it may have an impact on their future outcomes. Either country could impose new tariffs, import or export restrictions, trade embargoes, or sanctions. Furthermore, it isn't only geopolitics that could affect Texas Instruments' business in China. Management has also mentioned that they had not seen the expected recovery within China. Competition. In its annual report, Texas Instruments mentions that they face intense technological and pricing competition in the markets in which they operate. They expect this competition to continue increasing from large competitors and small competitors serving niche markets, as well as from emerging companies, particularly in Asia, that sell products into the same markets in which they operate. Furthermore, they may face increased competition as China actively promotes and reshapes its domestic semiconductor industry through policy changes and investments.
There are also numerous reasons to invest in Texas Instruments. One reason is the industrial and automotive sectors. In 2023, the industrial and automotive sectors combined made up 74% of Texas Instruments' revenue, which is an increase of about 9 percentage points from 2022 and a significant rise from 42% in 2013. Texas Instruments' industrial and automotive customers are increasingly turning to analog and embedded technologies to make their end products more reliable, affordable, and energy-efficient. These trends have resulted and will continue to result in growing chip content per application, which will drive faster growth compared to Texas Instruments' other markets. Management believes that the segments have the potential to grow faster than the overall semiconductor market over the coming decade, which bodes well for the future of Texas Instruments. Texas Instruments is shareholder-friendly. As mentioned earlier in the analysis, Texas Instruments has a strategic focus on increasing its free cash flow per share and returning this free cash flow to shareholders through dividends and buybacks. They have increased their dividend for 20 consecutive years, and these dividend increases represent 14% for the 5-year and 17% for the 10-year compounded annual growth rates. Furthermore, Texas Instruments has reduced its shares outstanding by 47% since 2004. Management does not plan to stop; they will continue returning all free cash flow to shareholders in the future as well. 40-80% of the free cash flow will be used for dividends, while the remaining amount will be allocated to share repurchases. The CHIPS and Science Act. The CHIPS and Science Act may end up being a great thing for Texas Instruments in the long term. The CHIPS and Science Act benefit Texas Instruments through manufacturing grants and investment tax credits. Texas Instruments has invested in new manufacturing plants in both Texas and Utah, which should fall under the CHIPS and Science Act. Texas Instruments believes that it will receive a cash benefit of around $4 billion for investments made through 2026. These investments should result in greater cost advantages and control over the supply chain, leading to higher profit margins and increased profitability.
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Now it is time to calculate the share price. I perform three different calculations that I learned at a Phil Town seminar. If you want to make the calculations yourself for this or other stocks, you can do so through the tools page on my website, where you have access to all three calculators.
The first is called the Margin of Safety price, which is calculated based on earnings per share (EPS), estimated future EPS growth, and estimated future price-to-earnings ratio (P/E). The minimum acceptable rate of return is 15%. I chose to use an EPS of 7,07, which is from the year 2023. I have selected a projected future EPS growth rate of 12%. Finbox expects EPS to grow by 12% in the next five years. Additionally, I have selected a projected future P/E ratio of 24, which is double the growth rate. This decision is based on Texas Instruments' historically higher price-to-earnings (P/E) ratio. Finally, our minimum acceptable rate of return has already been established at 15%. After performing the calculations, we determined the sticker price (also known as fair value or intrinsic value) to be $130,27 We want to have a margin of safety of 50%, so we will divide it by 2. This means that we want to buy Texas Instruments at a price of $65,14 (or lower, obviously) if we use the Margin of Safety price.
The second calculation is known as the Ten Cap price. The rate of return that a company owner (or stockholder) receives on the purchase price of the company essentially represents its return on investment. The minimum annual return should be at least 10%, which I calculate as follows: The operating cash flow last year was 6.420, and capital expenditures were 5.071. I attempted to analyze their annual report in order to calculate the percentage of capital expenditures allocated to maintenance. I couldn't find it, but as a rule of thumb, you can expect that 70% of the capital expenditures will be allocated to maintenance purposes. This means that we will use 3.550 in our calculations. The tax provision was 908. We have 909 outstanding shares. Hence, the calculation will be as follows: (6.420 – 3.550 + 908) / 909 x 10 = $41,56 in Ten Cap price.
The final calculation is referred to as the Payback Time price. It is a calculation based on the free cash flow per share. With Texas Instruments' free cash flow per share at $1,49 and a growth rate of 12%, if you want to recoup your investment in 8 years, the Payback Time price is $20,53.
I believe that Texas Instruments is a great company. While there are some uncertainties regarding management, I still feel confident in the new CEO, as he has ample experience with the company. Texas Instruments is facing some short-term headwinds as macroeconomic factors impact its end markets, but this situation is not expected to be permanent. Their exposure to China also needs monitoring as long as the relationship between the U.S. and China remains unchanged. Competition is also heating up as China actively promotes and reshapes its domestic semiconductor industry through policy changes and investments. However, I don't think that China's primary focus will be on inexpensive analog semiconductors. I believe that Texas Instruments has a great opportunity in the industrial and automotive sectors. Analog and embedded technologies can enhance product reliability, affordability, and energy efficiency, leading to an increase in chip content per application. The CHIPS and Science Act will allow Texas Instruments to invest in the future, resulting in greater cost advantages and control over their supply chain. This, in turn, will lead to higher profit margins and increased profitability. Finally, Texas Instruments is shareholder-friendly, returning all free cash flow to investors through dividends and buybacks. Texas Instruments had a challenging year in 2023, which is why the calculations I used in this analysis are very conservative. Texas Instruments reported higher EPS, operating cash flow, and free cash flow in 2022. Thus, doing the calculations based on the 2022 data would result in a much higher purchase price. It is why I will be comfortable purchasing Texas Instruments shares if they reach the intrinsic value of the Margin of Safety price at $130.
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