Texas Instruments (NYSE:TXN) makes computer chips, a still thriving product, but its profits fell and it sells to many industries in decline. So is there any reason to buy its stock?
On Monday, Texas Instruments reported second-quarter profits fell 13% to $672 million on revenue that fell 1.1% to $3.5 billion. The decline was a result of three problems: the March earthquake and tsunami in Japan, declining orders from Nokia (NYSE:NOK) and weak demand for PCs and TVs. The only good news was Texas Instruments’ analog division (which provides semiconductors for controlling the flow of power through circuits) enjoyed a 5% increase. And Texas Instrument’s crystal ball for the third quarter looks cloudy because of “mixed macroeconomic and market signals,” according to SeekingAlpha.
Nevertheless, it’s not all doom and gloom for investors considering Texas Instruments’ stock: Here are four reasons to consider it:
- Decent earnings reports. Texas Instruments has been able to meet or beat analyst’s expectations fairly consistently and has done so in four of its past six earnings reports. In its report yesterday, it once again beat expectations, reporting earnings of 56 cents per share on revenue of $3.46 billion — 6% above analysts’ forecast of $0.53 per share
- Solid growth and debt-free balance sheet. Texas Instruments has grown solidly. Its $14.2 billion in revenues has increased at an average rate of 2.5% during the past five years, and its net income of $3.2 billion has risen at a 7.9% annual rate during that period. Although its cash has declined at a 4.3% annual rate from $3.7 billion (2006) to $3.1 billion (2010), it has no debt, which gives it substantial financial flexibility.
- It is out-earning its cost of capital. Texas Instruments is earning more than its cost of capital and at a rapidly accelerating rate. How so? It produced positive EVA momentum, which measures the change in “economic value added” (essentially, profit after deducting capital costs) divided by sales. In 2010, Texas Instruments’ EVA momentum was 16%, based on 2009 revenue of $10.4 billion, and EVA that went from $400 million in 2009 to $2.1 billion in 2010 using a 10% weighted average cost of capital.
- Cheap stock. Texas Instruments’ price-to-earnings-to-growth ratio of 0.82 (where a PEG of 1.0 is considered fairly priced) means its stock price is attractively valued. Texas Instruments has a P/E of 11.85, and its earnings per share are expected to grow 14.4% to $2.72 in 2012.
The big concern for potential investors in Texas Instruments stock is future growth. Achieving that depends on whether its management can get more of its earnings from selling chips to faster-growing markets, such as tablets and smartphones, while cutting back on its sales to declining industries, such as PCs and TVs.
That could be tough, though, so its best hope might be to push harder to get more sales in its analog and embedded processing (makes chips to control automotive fuel flow) businesses.
If you believe Texas Instruments can achieve such a shift, then its current stock price is a gift. Otherwise, hold back and wait to see whether management makes progress on this change-in-business mix before considering an investment.
Peter Cohan has no financial interest in the securities mentioned.
