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  • Glenn

Texas Instruments: Still room to grow.

Opdateret: 30. okt.

Texas Instruments is the market leader in manufacturing analog and embedded processing chips. Analog chips are used in every electronic device, while embedded processors are used in most. Thus, Texas Instruments possesses the characteristics of a long-term compounder. In this analysis, I will investigate the company and make some calculations to determine a suitable price at which to purchase 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 very user-friendly and easy to get started with. You can start with as little as $50. Click on the picture below to get started

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 (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 2022 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 is in manufacturing and technology, which gives them an edge due to lower manufacturing costs and greater control over the supply chain. The second company has a wide portfolio, with over 80.000 products, which is more than their competitors. The third is the reach of market channels. In 2022, 70% of their revenue came from direct sales. The fourth advantage is diversity and longevity. Theyhave over 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 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 hasvast experience in the company. I am also reassured that Rich Templeton will remain 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 strong 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 invested capital, also known as ROIC. We want to see a 10-year history, with all the numbers being above 10% in each year. The numbers are very impressive, as Texas Instruments has delivered a 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% in the last five years. It shows that Texas Instruments is a strong company, and I would be very pleased to see such impressive numbers if I were invested in Texas Instruments.

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 actualnumbers and the percentage growth year over year. Texas Instruments' book value hasn't increased every year, but it is notsomething I am worried about. It is also nice to see that Texas Instruments has reached its highest level in the last two years, which hopefully bodes well for the future.

Finally, we will investigate the free cash flow. In short, free cash flow refers to the cash that a company generates after covering its operating expenses and capital expenditures. Levered free cash flow is the amount of money a company has remaining after paying all its financial obligations. I use the margin to provide a clearer understanding. Free cash flow yield refers to the amount of free cash flow per share that a company is projected to generate in relation to its market value per share. Not surprisingly, Texas Instruments has managed to deliver positive free cash flow in all ten years. Texas Instruments has also consistently delivered a solid levered free cash flow over the past ten years. Although the free cash flow yield is not as high as before, it still stands at 4%, indicating that Texas Instruments may not be excessively expensive. However, we will delve deeper into this later in the analysis.

Another important aspect to consider is the level of debt, and it is crucial to determine whether a business has a manageable debt that can be repaid within a period of 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 a debt-to-earnings ratio of 0,95 years.Hence, debt is not an issue for me if I invest in Texas Instruments.

Based on my findings thus far, I believe that Texas Instruments is an excellent company. However, no investment iswithout risk, and Texas Instruments also has its share of risks. One risk is macroeconomics. If we experience a prolongedrecession, it is reasonable to expect that there will be a decline in the Texas Instruments' end markets. We already saw some indications of that in the fourth quarter of 2022, where revenue was down 11% sequentially due to weaker demand in end markets. Management stated that, except for the automotive sector, all end markets exhibited weakness at the end of 2022. You should consider the possibility that the automotive industry may also experience weakness at some point, especially if we experience a prolonged recession. Meanwhile, the other two major end markets, industrial and personal electronics, are expected to remain weak. China Exposure. Texas Instruments makes about 25% 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. Management has previously stated that they expect the growth rate in China to exceed that of the global growth rate. Additionally, management has set a goalto achieve $45 billion in revenue in China by 2030. While management has stated that the current restrictions on exportsto China do not significantly impact their revenue, we cannot predict what restrictions may arise in the future. Losing market share in 2022. Texas Instruments is still the market leader when it comes to analog chips. However, in 2022, they reached their lowest market share in the last eight years, with a market share of 17,3%. Just the year before, the market share was 19%. Their largest competitor is Analog Devices, which has increased its market share from 6,8% in 2015 to 12,7% in 2022. It should be noted that Texas Instruments grew its market share as late as 2020, and that 2022 has been a tough year for most businesses. Nonetheless, I would monitor market share if I were invested in Texas Instruments..

There are also numerous advantages if you choose to invest in Texas Instruments. One advantage is the presence of 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 valued at approximately $89 billion in 2022, indicating ample room for Texas Instruments to expand. Furthermore, the company's management has expressed confidence in their ability to enhance their market share over time, despite the challenges faced 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 indicates that Texas Instruments also has significant potential for growth in this segment. Like their analog segment, management believes they are well positioned to grow their market share in embedded processing. Texas Instruments is shareholder-friendly. Texas Instruments has grown its free cash flow by 11% per year since 2004, and it has utilized this free cash flow to compensate its shareholders. They have increased their dividend for 19 consecutive years at a 25% compound annual growth rate (CAGR). Furthermore, Texas Instruments has reduced its shares outstanding by 47% since 2004. And management does not plan to stop, as they will continue returning all free cash flow to shareholders in 2023 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 benefits 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. These investments should result in greater cost advantages and control over their supply chain, which will lead to higher profit margins and increased profitability.

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 from 2022. I have chosen an estimated future EPS growth rate of 11% for Texas Instruments. This is based on their average annual EPS growth rate of 22% over the past five years, adjusted to align with their free cash flow growth. Additionally, I have estimated a future PE ratio of 22, which is double the growth rate. This isin line with the historically higher PE ratio for Texas Instruments. Lastly, we have set the minimum acceptable return rate at 15%. Doing the calculations, we come up with the sticker price (some call it fair value or intrinsic value) of $145,30. 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 $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 were 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. As a rule of thumb, you can expect 70% of the capital expenditures to be used for maintenance. This means that 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 as follows: (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 Texas Instruments' Free Cash Flow Per Share at 6,53 and a growth rate of 11%, if you want to recoup your purchase 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 with the company. Texas Instruments is facing some short-term headwinds as macroeconomics affect its end markets, but this situation is not expected to last forever. Their exposure toChina is also something that needs to be monitored as long as the relationship between the U.S. and China remains as it is.It is a bit concerning that Texas Instruments lost market share in 2022. However, considering the size of the addressable market and the management's confidence in regaining market share, it is not something that would deter 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 is 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 reaches the intrinsic value of $145,30 in my Margin of Safety price, I will open a position.

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