Summary
- Back in April, my stance was bullish on Texas Instruments, and I published an article where I considered the stock a "BUY".
- The company is still amazing - more so even, after beating expectations - but valuation is higher than ever outside of a single time in 2018.
- Given today's excessive valuation, I no longer consider it a "BUY". While the company is great, and I believe that the future may hold further appreciation, it is a "HOLD"
Since the publishing of my last Texas Instruments (TXN) article, "Texas Instruments: Transforming The World Since 1930", the company has appreciated and returned almost 15% in 4-5 months, representing annualized returns of almost 40%. The company's share price has gone up almost $15 since that time. Given the earnings beat and the current company share price, I consider this to represent a good time to update my overall thesis on the company.
I've noticed many contributors now posting very bullish articles arguing for the merits of buying the company at this time. I will point to historical precedents, as well as macro and other variables, which will result in a bullish forward expectation, but nonetheless not resulting in a "BUY".
Let's get into it.
The world's largest embedded chip-producer climbs further - 2Q19 and after
First of all, we've had a 2Q19 with a beat in EPS which bears talking about before we get into valuation and all those good things.
- FCF increase of 3% compared to the same period of 2018.
- FCF margin increase of 38.9%, increased by more than 2% from 36.6%.
- Some declines in volume insofar as Analog and Embedded processing went - but all of it expected.
- 12% drop in operating profit, and over 4% margin decrease insofar as operating margins go.
So while FCF improvements were recorded, Texas Instruments also recorded volume and sales declines across key segments. While this has left some investors wondering, it's important to remember that this sort of development is historically precedented when it comes to semi manufacturers - usually a few quarters of declines before the YoY revenue expansion once again occurs. There's little to suggest that now won't be different for the company - just risks that there may not be.
The company saw a quarter which as far as end markets are concerned, was about where they expected things to be. In addition, the company considers itself ready for whatever may come. This is from the 2Q19 earnings call about 2 months ago:
