A look Back at Texas Instruments
A year on, what has this semi conductor business done?
About a year ago I analyzed Texas Instruments TXN 0.00%↑ an American semiconductor firm focusing on older less cutting edge technology, particularly when it comes to analog circuits.
A year after I’ve thought the company was undervalued… The company has gone nowhere.
Was I wrong? Have the company’s fundamentals deteriorated? Let’s find out!
You can read the original analysis here:
The Thesis
The first thing we need to take into consideration is to see what I thought about the company, and what my thesis for the investment was:
Stable business in a growing industry with some competitive advantages
Efficient capital allocation and high returns on assets
Sustainable amounts of debt, and low cost of capital
The dividends and share buybacks will continue to drive shareholder returns
Some head winds will come in the next decade, including:
Higher levels of competition
Margin pressure and shrinkage
Reduced revenues
Capable and focused management team.
How has this held up?
Let’s take it point by point:
Stable business in a growing industry with some competitive advantages
This hasn’t really changed, though it seems that the cyclicality of semi conductor firms is now catching up to us.
While 2022 has seen record high revenues and earnings for Texas Instruments, the first half of 2023 has not been as positive with revenue dropping significantly (down 11% YoY in Q1).
Efficient capital allocation and high returns on assets
The company has historically kept a very tight grip on their Capital Expenditures and in their R&D expenditures, but that seems to have changed recently with $3.5 billion spent on R&D and SG&A and an additional $3.3 billion in capital expenditures, which is a significant increase over their historical trends.
This isn’t really great to see alongside a downturn in the general industry revenues, but it may well position them well to take a advantage of the recovery when it comes.
Sustainable amounts of debt, and low cost of capital
Well, the company has recently issued and priced $1.6 billion in investment grade notes, which has given us some insight to their cost of capital.
At around 5% cost of debt, that’s a significant increase from what we saw earlier in 2022, or the 2% we saw in 2021.
It’s clear that the low cost of capital days are gone, which is unfortunate given that they have more than tripled their long term debt since 2015…
It’s worth a look at this, because it is a problem.
The dividends and share buybacks will continue to drive shareholder returns
This hasn’t really changed.
At the time I published my analysis last year, the company was trading at around $170 per share. Today, it’s trading around $170 per share too.
Over the past year the only returns to investors have been dividends, and so that’s why it’s important to have a suitable dividend yield.
TXN 0.00%↑ has a yield around 2.8%, which is ok, but won’t be that great unless this continues to increase. So far they have managed to do so, but how likely is this growth to continue? What’s the risks involved?
It’s dificult to say.
Some head winds will come in the next decade, including:
Higher levels of competition
Margin pressure and shrinkage
Reduced revenues
We’ve already seen this come in this past half year, and it will likely continue.
An unfortunately accurate prediction.
Capable and focused management team.
The increase in debt and large R&D and Capex expenditures seem to have put this into question.
Only time will say whether this is still true, or if the management team has failed.
The future
Overall I feel like some of the fundamentals of the company have deteriorated in a somewhat predictable manner.
While the company still remains profitable and high quality, the increase expenditure in capex and R&D is concerning, particularly when it comes with the increases in long term debt at increasingly higher costs.
I think the company is still high quality, but it’s difficult to say whether it is undervalued given the bad macro, and the deterioration in its fundamentals.
My stance: HOLD
Do you own TXN 0.00%↑ ? Let me know what you think in the comments below!