Texas Instruments: Still room to grow.

Texas Instruments is the market leader in making analog and embedded processing chips. Analog chips are used in every electronic device while embedded processors are used in most. Thus, Texas Instruments has the characteristics of a long-term compounder. In this analysis I will investigate the company and make some calculations to find a price that I will buy 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 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 want to see which stocks I hold, you can read how to do so here. I have no skin in the game when it comes to Texas Instruments, meaning it shouldn't be hard to keep this analysis unbiased.

Texas Instruments was founded in 1951 and is headquartered in Dallas, Texas. They manufacture semiconductors that they sell to electronics designers and manufacturers all over the world. Texas Instruments has three financial segments: Analog (77 % of the 2022 revenue), Embedded processing (16 % of the 2022 revenue) and Other, which includes DLP products and calculators (7 % of the 2022 revenue). Texas Instruments operates in six different markets: Industrial (40 % of the 2022 revenue), Automotive (25 % of the 2022 revenue), Personal electronics (20 % of the 2022 revenue), Communications equipment (7 % of the 2022 revenue), Enterprise systems (6 % of the 2022 revenue), and Other (2 % of the 2020 revenue). Texas Instruments has facilities in more than 30 countries and generate about 65 % of their revenue outside of the United States. Texas Instruments have four competitive advantages. The first is manufacturing and technology, which gives them an advantage because of lower manufacturing costs and greater control of supply chain. The second is a broad portfolio, where their 80.000 products are more than their competitors. The third is reach of market channels, in 2022 70 % of their revenue was from direct sales. The fourth is diversity and longevity, as they have more than 100.000 customers and their investments in manufacturing equipment make their business less capital intensive. Being a market leader with four competitive advantages is what gives Texas Instruments a brand moat.

Their CEO is Haviv Ilan. He joined Texas Instruments in 1999 and became the CEO April 1, 2023. Prior to joining Texas Instruments, he held a position in Butterfly, which was a wireless start-up company in Israel that was acquired by Texas Instruments. Haviv Ilan has held several positions in Texas Instruments through his 24 years in the company, thus he has a vast experience in the industry. He has a bachelor's and master's degrees in electrical engineering from Tel Aviv University and also 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 to win. 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 as he was handpicked by former CEO Rich Templeton and because of his vast experience in the company. I also feel reassured that Rich Templeton will stay on the Board of Directors. Nonetheless, only time will show if Haviv Ilan is the right person for the job.

I believe that Texas Instruments has a brand moat. However, there are some uncertainties regarding the management. Now let us investigate the numbers to see, if Texas Instruments lives up to our requirements for a strong moat. In case you want an explanation about what the numbers are, you can have a look at "MY STRATEGY" on the website.

The first number we will investigate is the return on investment capital, also known as ROIC. We want to see 10 years of history and we want the numbers to be above 10 % in all years. The numbers are very impressing as Texas Instruments has delivered a ROIC above 10 % in each year in the last ten years. Furthermore, it is very nice to see that they have managed to deliver a ROIC above 30 % in the last five years. It shows that it is a strong company, and I would be very happy to see numbers like these, if I was invested in Texas Instruments.

The next numbers are the book value + dividend. In my old format this was known as the equity growth rate. It was the most important of the four growth rates I used to use in my analyses, which is why I will continue to use it moving forward. As you are used to see the numbers in percentage, I have decided to share both the numbers and the percentage growth year over year. Texas Instruments' book value hasn't increased every year, but it isn't something I'm worried about. It is also nice to see that Texas Instruments has reached their highest level in the last two years, which hopefully bodes well for the future.

Finally, we investigate the free cash flow. In short, free cash flow is the cash a company generates after it has paid for operating expenses and capital expenditures. Levered free cash flow is the amount of money a company has left remaining after paying all its financial obligations, I use the margin for it to make more sense. Free cash flow yield is the free cash flow per share a company is expected to earn against its market value per share. Not surprisingly, Texas Instruments has managed to deliver a positive free cash flow in all ten years. Texas instruments has also managed to deliver a solid levered free cash flow in all ten years, and while the free cash flow yield isn't as high as previous, it is still at 4 %, which indicates that Texas Instruments may not be overly expensive, but we get back to that later in the analysis.

Another important thing to investigate is debt, and we want to see if a business has a reasonable debt that can be paid off within 3 years. We do so by dividing the total long-term debt by earnings. Doing the calculation on Texas Instruments, I can see that Texas Instruments has 0,95 years earnings in debt. Hence, debt is not an issue for me if I will invest in Texas Instruments.

Based on my findings so far, I believe that Texas Instruments is a great company. However, no investments are without risk and Texas Instruments has some risks as well. One risk is Macroeconomics. If we have a longer recession, you ought to think that we will see some weakness in the Texas Instruments' end markets. We already saw some indications on that in fourth quarter in 2022 where revenue was down 11 % sequentially because of weaker demand in end markets. Management said that all end markets except for automotive showed weakness in the end of 2022. You ought to think that automotive will also show weakness at some point, if we see a longer recession, while the other two large end markets industrial and personal electronics will continue to be weak. China exposure. Texas Instruments makes about 25 % of their revenue in China. If we continue to see the relationship between the United States and China getting worse, it may affect their results in the future. Management has previously stated that they expect the growth rate in China exceeding that of the global growth rate, and management has the objective to reach $45 billion revenue in China by 2030. While management has stated that the current restrictions on export to China does not impact their revenue significantly, we don't know what restrictions may appear in the future. Losing market share in 2022. Texas Instruments is still the market leader when it comes to analog chips but in 2022, they reached the lowest market share in the last eight years as their market share was 17,3 %. Just the year before, the market share was 19 %. Their largest competitor is Analog Devices that has gone from a 6,8 % market share in 2015 to a 12,7 % market share in 2022. It should be noted that Texas Instruments grew their market shares as late as in 2020, and that 2022 has been a tough year for most businesses. Nonetheless, I would monitor market share if I was invested in Texas Instruments.

There are also plenty of positives if you decide to invest in Texas Instruments. One is a large addressable market. In 2022 Texas Instruments generated around $20 billion in revenue. Of that $15,36 billion was from analog chips. The analog chips market was about $89 billion in 2022, thus there are plenty of room for Texas Instruments to grow, and management has stated that they believe they are well positioned to increase their market share over time despite what we saw in 2022. In 2022 Texas Instruments generated $3,26 billion from their embedded processing business. The total embedded processing market was $28 billion in 2022, which shows that Texas Instruments also has a lot of room to grow in this segment. Like with their analog segment, management believe they are well positioned to grow their market share in embedded processing. Texas Instruments is shareholder friendly. Texas Instruments has grown their free cash flow by 11 % a year since 2004, and they have used that free cash flow to reward their shareholders. They have increased their dividend for 19 consecutive years at a 25 % CAGR. Furthermore, Texas Instruments has reduced their shares outstanding by 47 % since 2004. And management do not plan to stop as they will return all free cash flow to shareholders in 2023 as well. 40-80 % of the free cash flow will be used on dividends, while the rest will be used on share repurchases. The CHIPS and Science Act. The CHIPS and Science Act may end up being a great thing for Texas Instruments for the long term. The CHIPS and Science Act benefits Texas Instruments through manufacturing grants and investment tax credits. Texas Instruments has invested in new manufacturing in plants in both Texas and Utah, which should be under the CHIPS and Science Act. These investments should result in greater cost advantages and control of their supply chain, which will lead to higher margins and more profits.

All right, we have gone through the numbers, potential and risk regarding Texas Instruments, and now it is time for us to calculate a price for Texas Instruments. To calculate price, we will need the numbers that I have explained in the "MY STRATEGY" section of the website, as I do not want to go through the whole calculation here. I chose to use an EPS of 9,41, which is the one from 2022. I chose an Estimated future EPS growth rate of 11 (Texas Instruments has grown their EPS by 22 % a year the last five years but I keep it in line with free cash flow growth), Estimated future PE 22 (which the double of the growth rate, as the historically PE for Texas Instruments has been higher) and we already have the minimum acceptable return rate on 15 %. Doing the calculations by using the formula I described in "MY STRATEGY" we come up with the sticker price (some call it fair value or intrinsic value) of $145,30, and we want to have a margin of safety on 50 % so we will divide it by 2, meaning that we want to buy Texas Instruments at price of $72,65 (or lower obviously), if we use the Margin of Safety price.

Our second way to calculate a buy price is the TEN CAP price, which is also explained at "MY STRATEGY". To do so, we need some numbers from their financial statements, keep in mind that all numbers are in millions. The operating cash flow last year was 8.720. The Capital Expenditures was 2.797. I tried to look through their annual report to see, how much of the capital expenditures were used on maintenance. I couldn't find it though, so as a rule of thumb, you expect 70 % of the capital expenditures to be used on maintenance, meaning we will use 1.958 in our further calculations. The Tax Provision was 1.283. We have 906 outstanding shares. Hence, the calculation will be like this: (8.720 - 1.958 + 1.283) / 906 x 10 = $88,79 in TEN CAP price.

The last calculation is the PAYBACK TIME. I also described in "MY STRATEGY". With the Free Cash Flow Per Share at 6,53 and a growth rate of 11 %, if you want your purchase back in 8 years, the PAYBACK TIME price is $85,96.

I believe that Texas Instruments is a great company. While there are some unknowns regarding management, I still feel confident in the new CEO, as he has plenty of experience from the company. Texas Instruments is facing some short-term headwinds as macroeconomics affect their end markets, but it won't last forever. Their China exposure is also something that needs to be monitored as long the relationship between the U.S and China is as it is. It is a bit concerning that Texas Instruments lost market shares in 2022 but with the addressable market being this large and with management being confident in winning market shares in time, it isn't something that will keep me from investing in the company. I believe that Texas Instruments has plenty of room to grow and the CHIPS and Science Act will lead to long-term gains. I also really like that Texas Instruments are very shareholder friendly. I don't think that we will see Texas Instruments trading at a 50 % discount on any of my calculations, but to quote Warren Buffett: "It is better to buy a wonderful company at a fair price than a fair company at a wonderful price". If Texas Instruments reach the intrinsic value of $145,30 in my Margin of Safety price, I will open a position.

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