Summary
- TXN is a blue chip name that all DGI investors should consider owning.
- The stock's 3% yield + ~20% long-term dividend growth CAGR are essentially unmatched.
- However, the company is experiencing a tough macro environment and short-term results aren't pretty.
- My fair value estimate is $105; that's where I'd like to add.
- This idea was discussed in more depth with members of my private investing community, The Dividend Growth Club . Get started today »
It’s never fun to see one of your holdings take a deep dive after posting earnings. Usually, these are the types of sell-offs that I attempt to take advantage of, because more often than not, I’ve found that double-digit sell-offs in response to an earnings event are overreactions by short-term traders that give long-term investors a chance to buy shares at a discount. However, sometimes these sell-offs are justified. Sometimes a company totally disappoints and deserves to be punished for its results. Other times, stocks are headed into the earnings reports with elevated premiums attached to them, implying that they’re priced for perfection. Perfection is a tough standard to live up to. In my opinion, an irrationally high valuation premium was the high hurdle that Texas Instruments (TXN) couldn’t clear in its recent earnings report. This is why I haven’t added to the stock, even though shares have fallen nearly 10% since the company reported earnings on Tuesday afternoon.
Valuation
Even with the recent sell-off in mind, TXN shares have had a really strong 2019. They closed 2018 trading for $94.50 and prior to the Q3 dip, they hit highs above $132.00. In the opening, I described the company’s prior multiple as irrational because this nearly 40% share price run-up was not supported by the underlying fundamentals. While TXN has beaten analyst estimates when it comes to its quarterly EPS numbers in all 3 quarters thus far in 2019, what’s more important is that the company’s bottom line continues to contract. It’s great beating analyst estimates, but when the bar is set low because of perceived macro weakness, I don’t think it should have caused the stock to spike. Through the first three quarters of 2018, TXN’s reported EPS was $4.33. Through the first three quarters of this year, we’re looking at reported EPS of $4.11. Management isn’t guiding for a blowout Q4 and analysts agree. Right now, the consensus estimate for full-year 2019 EPS is $5.12, which will represent -8% growth y/y.
To me, a company producing negative y/y earnings growth should not have been priced with a P/E multiple nearing 25x. The fact that analysts currently expect to see flat to slightly negative EPS growth in 2020 further supports this sentiment.
Looking back at the last 10 years, TXN’s average P/E ratio is roughly 20x (I usually like to look at 20-year data as well, but TXN’s valuation during the dot-com boom was so high that it pushes the long-term average up to artificially high levels, so I’ll stick with the more recent averages). In other words, the recent ~25x multiple represented a ~25% premium relative to recent averages. Once again, I don’t think the current and future growth outlook justified such a high premium.
