Today we have a moderately speculative idea with a conservative touch: take shares of the manufacturer of integrated devices Texas Instruments (NASDAQ: TXN), in order to capitalize on the growth in demand for its products.
Growth potential and validity: 14% during 14 months excluding dividends; 21,5% behind 2 years excluding dividends; 8% during 15 years including dividends.
Why stocks can go up: because semiconductors are a very profitable topic.
How do we act: we take shares on 161,97 $.
When creating the material, sources were used, inaccessible to users from the Russian Federation. We hope, Do you know, what to do.
No guarantees
Our reflections are based on the analysis of the company's business and the personal experience of our investors, but remember: not a fact, that the investment idea will work like this, as we expect. Everything, what we write, are forecasts and hypotheses, not a call to action. To rely on our reflections or not – it's up to you.
And what is there with the author's forecasts
Research, like this and this, talk about, that the accuracy of target price predictions is low. And that's ok: there are always too many surprises on the stock exchange and accurate forecasts are rarely realized. If the situation were reversed, then funds based on computer algorithms would show results better than people, but alas, they work worse.
So we're not trying to build complex models.. The profitability forecast in the article is the author's expectations. We specify this forecast for the landmark. As with the investment idea in general, readers decide for themselves, it is worth trusting the author and focusing on the forecast or not.
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Investment editorial office
What the company makes money on
TXN is a semiconductor business. The company is engaged in the production of integrated devices. It goes through the main stages of semiconductor production, published under her brand:
- Produces its own silicon wafers and divides them into individual chips.
- Testing, collects and packs chips.
- Assembles them into components and finished devices.
According to the company's latest annual report, its revenue is divided into the following segments:
- Analog Components - 76,59%. Components, allowing the device to receive signals, in which they are embedded. Segment operating margin — 52,61% from its proceeds.
- Embedded Components - 16,62%. These are things like microcontrollers - devices, allowing electronics to perform specific tasks. For example, they are watching it, so that the battery does not overheat and work without failures. Segment operating margin — 38,5% from its proceeds.
- Other - 6,79%. These are calculators, ASIC, also non-core activity of the company, such as the results of litigation. Segment operating margin — 31,56% from its proceeds.
Revenue is broken down by industry as follows::
- Industry - 41%.
- Automotive 21%.
- Consumer Electronics - 24%.
- Telecommunication equipment - 6%.
- Calculators and more - 2%.
Revenue by country and region:
- USA - 10,39%.
- Asia - 66,42%, PRC gives 54,51% company revenue.
- Europe, Middle East and Africa - 15,27%.
- Japan - 5,22%.
- Other countries and regions - 2,7%.
Arguments in favor of the company
Fell down. Promotions for these 4 months fell from 201 to 161,97 $. This gives us the opportunity to pick them up in anticipation of a rebound..
Same, as before, only better. A couple of years ago there was an investment idea for TXN, but she was more tactical: catch stocks on the dip. Since, as the famous joke said, "the concept has changed". The semiconductor market has become more attractive and promising, than before the pandemic: digitalization is no longer gradual, but forced. All this has dramatically increased the demand for TXN products in all sectors of the economy., which the company serves.
Factories need to automate equipment, because the pool of available labor is drying up and the endless pandemic makes the human factor too risky. Cars require more and more electronics - "thank you" to the electrification of transport imposed by the establishment. Endless quarantines require consumers to use gadgets, and all the above processes have a significant load on telecommunication capacities.
Back in 2019, one could abstractly talk about, that TXN's business "will benefit from the Internet of Things and other technological singularities". And now it's safe to say, that TXN is a critical supplier of critical components, surplus of which has not yet been observed. So what can you expect, that the company's revenue and profits will grow for at least a few more years.
The best argument in favor of TXN and others like it will be an analysis of the report of the US government on the state of affairs with the demand for semiconductors in the US in a variety of industries.:
- the stock of chips at American factories is enough for 5 days of production - which is much less, how 40 days in 2019;
- most of the chip factories have loaded their production capacities at more than 90%, and supply opportunities do not meet the needs of growing demand;
- relief of the situation should not be expected in the coming 6 months at least.
Dividends. Company latest 18 has been steadily increasing dividends for years and is now paying 4,6 $ per share per year. This gives about 2,79% per annum. It's not crazy big money., but still well above the "hospital average" - almost twice the dividend yield of the S index&P 500. Given the positive business environment of the company and the previous dividend history, investors can run into its shares, loving "passive income", in anticipation of future pay increases.
What can get in the way
Logistics. According to the annual report, 20% silicon wafers, required for the production of chips, TXN purchases from third parties. During assembly steps, TXN chip packaging and testing relies even more on third-party contractors: nearly 40% TXN chips are tested and assembled by outside contractors.
Given the problems with logistics and the ever-increasing cost of raw materials, TXN might face a situation, when plates and chips won't arrive on time. Or will it cost more, which will not be slow to affect its reporting in the worst way.
Also, reporting may be affected by an increase in the cost of labor of workers and purchased raw materials - although we can expect the main increase in costs from outsourcers: after all, TXN can better control the situation in its manufacturing plants. By the way,, the latest TXN report turned out to be significantly better than analysts' expectations - and this is during the period, when many manufacturing companies suffer from rising costs.
China. A huge part of the company's revenue comes from China, and in case, if Washington decides to crush the Chinese technology sector, this could be very bad for TXN's business and quotes.
Dividends. The company spends on payments 62% her free cash flow, or 55,69% from its final profit. At the same time, the company has a total debt of $11.343 billion., out of which, Really, during the year, only a small part needs to be repaid - 2.569 billion.
There is enough money directly at the disposal of the company to close all urgent debts: there are 4.631 billion in accounts. There are still 1.701 billion debts of counterparties and as many as 5.108 billion short-term investments - it is implied, that these assets are very liquid.
At the same time, TXN plans to greatly increase spending on business expansion - with 13 to 17% from revenue - and keep these costs at the level 10% from revenue until 2026. It seems to me, this, at best, minimizes the possibility of a company raising dividends. And in the worst case, the company may well cut or even cancel payments in order to close debts and develop its production - and this can lead to a drop in quotations..
It is not normal. The current rise in chip prices seems an anomaly in retrospect: a couple of years ago, the semiconductor business was characterized by great competition and redundant supply. In the old investment idea, I saw this as one of the main problems of the company.
Actually, in the table with the annual results of TXN you can see, that the company's sales have been marking time for many years, until there is a breakthrough in 2020-2021, caused by a shortage of chips with a strong increase in demand.
Given the growth of profitability of this business, many semiconductor companies are stepping up investment in expansion - as is TXN itself. And TXN has a lot of direct competitors: for example, in the niche of analog chips, which are the main source of its revenue, she has 19% market and she is a leading player, but not the only one.
Its closest competitors Analog Devices and Infineon are also likely to expand production., and after some time it can lead to a crisis of glut and a drop in chip prices. Or at least to stop the rapid growth of the margins of this business.
Quite a few. The company is not cheap: P / S — 9,07, P / E she has about 20. That's not a lot, but still the company does not look monstrously undervalued. So I would not really count on the rapid growth of quotations here..
What's the bottom line?
Shares can be taken now by 161,97 $. Then there are three options:
- hold shares until 185 $. All things considered, we can expect this level to be reached within the next 14 Months;
- wait for the stock to return to price 200 $. Think, we will reach this level in the next two years;
- hold shares 15 years, as the company grows, grows stronger and increases dividends.
Taking into account the dividend factor, you should look more often at the news section on the company's website. If she cuts her payments, you can try to reset the shares before, how investors in America and on the St. Petersburg Exchange will react to this news.
