Analysis Spotlight: Texas Instruments (TXN)

Good day.

Tuesday January 23rd was not a good day for Texas Instruments (TXN). The stock was smacked pretty hard after ‘disappointing earnings’.

Given the run higher the stock and the semiconductor sector had, we wondered if this could be a bit of a heads up to something a bit more ominious.

Technically speaking I had noted to clients that the 5-wave decline was problematic. In Elliott Wave analysis, 5-wave moves are followed by a modest 3-wave correction and then at minimum another 5-wave move – decline in this case.

So, at minimum, prices could drop towards $102+/-…..from solely a technical perspective.

Fundamental View

  • On a free cash basis, before earnings, TXN looked to be valued around $90. However, the projected effect of tax reform looked like it could increase the valuation to around $120. Then, earnings come out, the numbers were strong but slightly disappointing for a valuation that had possibly overshot its target. So, we get a correction. Currently trading around $110.
  • Looking at the earnings in more detail, we see that the TXN business model continues to be strong. The firm’s portfolio of products is more diversified than in the past. Revenue from products in industrial and automotive increased from 42% one year ago to 54% of revenue today. Management believes this market has room to run.
  • While this year’s growth is projected to be less than last year’s growth, it will likely still be strong. As a result, today a few analysts have issued supportive recommendations.

It is somewhat comical when analysts “upgrade” a stock and give it a price target of what it’s current price is. Uh, yeah, thanks for stating the obvious.

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So, if we’re looking for stocks that will follow through to the downside, this might not be the one. Yes, technically we could make a case for lower levels, but the valuation and fundamental view have more sway here.
First, the industry is strong. Second, the firm’s products are diversified (not concentrated on a few customers). The free cash from the business is strong. The firm is investing money in growth. The capital structure is reasonable and not overextended with debt.
All in all, TXN is probably going to be okay. Our assessment is that it will continue to track higher with the overall semiconductor industry.
Stay tuned.

 

Dave


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