What a fantastic six months it’s been for Texas Instruments. Shares of the company have skyrocketed 62.1%, hitting $306.50. This was partly due to its solid quarterly results, and the run-up might have investors contemplating their next move.
Is now the time to buy Texas Instruments, or should you be careful about including it in your portfolio? Get the full breakdown from our expert analysts, it’s free.
Why Is Texas Instruments Not Exciting?
We’re happy investors have made money, but we’re swiping left on Texas Instruments for now. Here are three reasons why TXN doesn’t excite us, plus one stock we’d rather own.
1. Long-Term Revenue Growth Disappoints
A company’s long-term sales performance can indicate its overall quality. Any business can experience short-term success, but top-performing ones enjoy sustained growth for years. Over the last five years, Texas Instruments grew its sales at a mediocre 3.6% compounded annual growth rate. This was below our standard for the semiconductor sector. Semiconductors are a cyclical industry, and long-term investors should be prepared for periods of high growth followed by periods of revenue contractions.
2. Shrinking Operating Margin
Operating margin is one of the best measures of profitability because it tells us how much money a company takes home after procuring and manufacturing its products, marketing and selling those products, and most importantly, keeping them relevant through research and development.
Looking at the trend in its profitability, Texas Instruments’s operating margin decreased by 15.3 percentage points over the last five years. This raises questions about the company’s expense base because its revenue growth should have given it leverage on its fixed costs, resulting in better economies of scale and profitability. Its operating margin for the trailing 12 months was 35.3%.
3. Free Cash Flow Margin Dropping
Free cash flow isn’t a prominently featured metric in company financials and earnings releases, but we think it’s telling because it accounts for all operating and capital expenses, making it tough to manipulate. Cash is king.
As you can see below, Texas Instruments’s margin dropped by 10.4 percentage points over the last five years. It may have ticked higher more recently, but shareholders are likely hoping for its margin to at least revert to its historical level. If the longer-term trend returns, it could signal it is in the middle of an investment cycle. Texas Instruments’s free cash flow margin for the trailing 12 months was 23.6%.
Final Judgment
Texas Instruments isn’t a terrible business, but it doesn’t pass our quality test. After the recent surge, the stock trades at 36.2× forward P/E (or $306.50 per share). While this valuation is reasonable, we don’t really see a big opportunity at the moment. We’re pretty confident there are superior stocks to buy right now. We’d suggest looking at a fast-growing restaurant franchise with an A+ ranch dressing sauce.
Stocks We Would Buy Instead of Texas Instruments
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