Summary
Texas Instruments has been consistently growing FCF/Share over the last 15 years.
The company increases shareholder value through dividend payments, buybacks, and improving profitability.
The semiconductor industry is poised for growth and some change in the near term.
Revenue growth has stalled over the past 10-year period.
kool99/E+ via Getty Images Thesis
Texas Instruments Inc. ( TXN ) is one of the largest semiconductor manufacturing companies in the world, currently trading at a $170B Market cap. Throughout its history, the company has created a diversified, trusted product range and established long-run customer relationships while running a Free Cash Flow rich business model. The company’s commitment to increasing shareholder value through FCF/Share growth, stock repurchases, dividend distributions and increasing profitability will be examined throughout this analysis. About Texas Instruments
Headquartered in Dallas, Texas, the company has design, manufacturing and sales operations in more than 30 countries around the world. Texas Instruments’ business model is focused on analog and embedded processing products and built around four sustainable competitive advantages. A strong foundation of manufacturing and technology
A broad portfolio of analog and embedded processing products
The reach of our market channels
Diversity and longevity of our products, markets and customer positions Source: Investor Resources
Over the last decade, Texas Instruments has exhibited impressive overall performance. 10-year Total returns amount to 748.44%, exceeding by far the S&P’s 348.39% for the same period. After taking a significant hit from Covid-19 in 2020, recovery has been swift, with the stock reaching new highs ever since. Today’s share price of $185 (as of the time this article is written) represents a 2-year 44% growth and a 98% growth from early-2020 lows. Total returns for the last 10 years are displayed in the chart below. Source: Seeking Alpha The Industry
The future of the semiconductor industry is promising, and Texas Instruments has long been established as a key player covering a significant market share. The United States claims 46% of the market share for global sales of semiconductors, while TXN is among the top five industry leaders, ranked fourth overall with a 113B Market share. Source: irds.ieee.org
According to PwC’s research, the future of the industry lies in product customization. It is no longer about the best possible performance at the lowest price, but rather about building chips exclusively designed for very specific applications. Texas Instruments’ extensive product portfolio and manufacturing capabilities will be the catalyst to capture this swiftly forming industry trend. Flexibility that allows for substantial customer interaction is also a beneficial factor that TXN possesses.
The global semiconductor market is expected to grow by 17.3% in 2021 versus 10.8% in the previous calendar year, according to research firm IDC . According to the same research, a balance in terms of capacity is expected at the end of 2022 when a slowdown in growth is likely.
A great resource for investors looking for a more thorough analysis of the semiconductor industry that I suggest is a recent article by SA contributor Kennan Mell. Examining The Financials
Throughout Texas Instruments’ financial reports and investor resources, the firm’s management reiterates that their main objective is to maximize Free Cash Flow growth per share. While revenue has been stagnant for many years now, the company has employed many different tools to achieve that goal and deliver value to shareholders. To that end, TXN has been successful, since FCF/Share has seen exponential growth since 2004, as shown in the graph below. FCF per share has grown at a 12% rate compounded annually over the last 15 years. Source: Investor Resources
Since revenue has stayed relatively flat during the course of the last decade, Texas Instruments’ management has found that their FCF/Share growth objective can be attained through margin expansion, reduction of weighted average shares outstanding and strategic capital allocation. In terms of margin growth, the company has done an excellent job expanding both its gross and net margin from the already elevated levels it stood at, 10 years ago. At the end of 2020, Gross margin stood at 64.10%, 20% higher than where it was in 2010. Net income margin growth impresses even more. Currently, net margin stands at all-time high levels of around 38.50%. Shares outstanding have also seen a significant reduction over the past decade, dropping from 1.2 billion in 2010 to 920 million today (a 33% 10-year reduction).
The third key factor for the effectiveness of TXN’s business model has been the strategic and disciplined allocation of capital. This trickles down to capital spent on R&D […]
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