Texas Instruments (NASDAQ:TXN) stock has had a fine performance so far during the novel coronavirus crisis. Shares tanked from $130 to $95 during the market crash but have subsequently bounced back to $110. That’s not as strong as some tech companies, but it’s not bad at all.
Investors shouldn’t expect Texas Instruments to go roaring back to new all-time highs immediately. It has heavy exposure to industrial markets, such as autos, that are likely to be depressed for a few quarters. And global supply chain disruptions could slow a comeback as well. If you’re looking for the highest-flying semiconductor stock over the next few months, it probably won’t be Texas Instruments.
But for growth and income investors, there is a lot to like.
A Solid Quarter
The company’s recent earnings report helped bolster confidence. While it was far from perfect, it came in a lot better than you might have expected given current economic conditions. Texas Instruments’ earnings of $1.14 per share beat expectations by a wide margin, as analysts had forecast just $1.02. Also impressively, the company’s revenues fell just 7% year-over-year.
For the second quarter, the company didn’t pull guidance altogether, as many other firms are doing. However, the company did say it is now operating as it did in 2008, that is to say it is preparing for a wide range of potential outcomes. It offered a broadened guidance range, with Q2 revenues now expected to come in between $2.6 billion and $3.1 billion. The top end of that would be phenomenal, while $2.6 billion would be close to a 20% decline. Still, some analysts had seen worse coming.
Similarly, the firm projects Q2 earnings of 64 cents to $1.04. The lower end of that range would be a disappointment, but is still fine given the extent of the economic crisis. The firm’s dividend is 90 cents per quarter, meaning that even during the brunt of the economic downturn, Texas Instruments could largely cover its 3.2% dividend yield out of operating earnings. That’s impressive. And that wasn’t the only good news on the financial side of things.
A Fantastic Bond Offering
Recently, Texas Instruments went into the bond market and pulled in $750 million of fresh cash. For many companies, raising funds has been painful since the crisis hit, with firms having to agree to extortionate interest rates to get much needed cash.
Texas Instruments, by contrast, pulled in nearly a billion dollars at an interest rate of just 1.75% annually. This means that the firm is borrowing for barely 1% per year more than the U.S. government pays on its debt. That’s a clear sign that the market has no concern whatsoever about Texas Instruments’ prospects going forward. The company is good for its obligations. In times like this, that’s reassuring both to the company’s customers and also its shareholders.
Texas Instruments: Flexing Its Cash to Expand Its Dominance
Now why might Texas Instruments be so keen on having more funds on hand now? The bond offering was specifically for general corporate purposes, which means management doesn’t have to spend it on anything in particular. In volatile times, such as now, having a loaded treasury gives you the ability to act quickly when opportunities present themselves.
And we have a few ideas of what Texas Instruments might be up to. For one thing, management announced an interesting plan to keep its inventory levels high. Unlike rivals, Texas Instruments isn’t slashing production thanks to the downturn. Instead, it is maintaining production levels. In past economic downturns, semiconductor companies got caught with insufficient inventories when markets turned back up. This led to product shortages, and unhappy customers.
Texas Instruments is avoiding that by having all its products on-hand at normal levels. When commercial and industrial activity comes back, Texas Instruments will be ready to fulfill all orders without delay. This could be a huge edge over rivals which can’t afford to build their inventories thanks to more limited balance sheets.
Additionally, Texas Instruments is in the market for acquisitions. There is also talk that the company may look to pick up used manufacturing equipment if any comes up at an attractive price. Economic distress will hit weaker semiconductor players hard, while giving Texas Instruments the opportunity to further its competitive advantages.
The Verdict on TXN Stock
Texas Instruments is categorized as a technology company. And that’s correct, it predominantly makes semiconductor chips, after all. However, it’s important to note that a ton of Texas Instruments products go into industrial uses. The company is heavily levered to sensors and measuring equipment for industrial applications. And that’s before you get to the company’s largest market, which is electrical gear for autos.
As such, Texas Instruments’ stock won’t necessarily follow the the rest of the tech sector, for better or worse. If you think the U.S. economy can get back on track relatively quickly and things such as auto demand pick back up nicely, Texas Instruments could be a surprising winner.
In any case, the company has a fantastic balance sheet and a highly diversified line of products. This gives it the ability to ride out a prolonged economic downturn, if things should come to that. The company’s recent bond offering was simply sensational, and shows its resilience in tough times. The speed of Texas Instruments’ resurgence will depend on how quickly American industry springs back to life. When it does, shareholders will be rewarded.
Ian Bezek has written more than 1,000 articles for InvestorPlace.com and Seeking Alpha. He also worked as a Junior Analyst for Kerrisdale Capital, a $300 million New York City-based hedge fund. You can reach him on Twitter at @irbezek. At the time of this writing, he owned TXN stock.
