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ModernGraham Valuation: Texas Instruments Inc. (TXN)

moneyCompany Profile (obtained from Google Finance): Texas Instruments Inc. (TI) designs and makes semiconductors that the Company sells to electronics designers and manufacturers all over the world. The Company has four segments: Analog, Embedded Processing, Wireless and Other. The Company’s products, more than 100,000 orderable parts, are integrated circuits that are used to accomplish many different things, such as converting and amplifying signals, interfacing with other devices, managing and distributing power, processing data, canceling noise and improving signal resolution. The Company sells catalog and, to a lesser extent, custom semiconductor products. The life cycles of catalog products generally span multiple years, with some products continuing to sell for decades after their initial release. The life cycles of custom products are generally determined by end-equipment upgrade cycles and can be as short as 12 to 24 months.

Defensive and Enterprising Investor Tests (What is the significance of these tests, and what is PEmg ratio?):

Defensive Investor – must pass at least 6 of the following 7 tests: Score = 4/7

  1. Adequate Size of Enterprise – market capitalization of at least $2 billion – PASS
  2. Sufficiently Strong Financial Condition – current ratio greater than 2 – PASS
  3. Earnings Stability – positive earnings per share for at least 10 straight years – PASS
  4. Dividend Record – has paid a dividend for at least 10 straight years – PASS
  5. Earnings Growth – earnings per share has increased by at least 1/3 over the last 10 years using 3 year averages at beginning and end of period – FAIL
  6. Moderate PEmg ratio – PEmg is less than 20 – FAIL
  7. Moderate Price to Assets – PB ratio is less than 2.5 or PB x PEmg is less than 50 – FAIL

Enterprising Investor – must pass at least 4 of the following 5 tests or be suitable for a defensive investor: Score = 5/5

  1. Sufficiently Strong Financial Condition, Part 1 – current ratio greater than 1.5 – PASS
  2. Sufficiently Strong Financial Condition, Part 2 – Debt to Net Current Assets ratio less than 1.1 – PASS
  3. Earnings Stability – positive earnings per share for at least 5 years – PASS
  4. Dividend Record – currently pays a dividend – PASS
  5. Earnings growth – EPSmg greater than 5 years ago – PASS

Valuation Summary (Explanation of the ModernGraham Valuation Model)

Key Data:

MG Value $31
MG Opinion Overvalued
Value Based on 3% Growth $27
Value Based on 0% Growth $16
Market Implied Growth Rate 7.23%
Net Current Asset Value (NCAV) -$0.08
PEmg 22.96
Current Ratio 2.98
PB Ratio 4.23

Balance Sheet – 9/30/2013 

Current Assets $8,101,000,000
Current Liabilities $2,723,000,000
Total Debt $4,161,000,000
Total Assets $19,244,000,000
Intangible Assets $6,806,000,000
Total Liabilities $8,193,000,000
Outstanding Shares 1,094,560,000

Earnings Per Share – Diluted

2013 (estimate) $1.91
2012 $1.53
2011 $1.91
2010 $2.66
2009 $1.15
2008 $1.45
2007 $1.83
2006 $1.69
2005 $1.39
2004 $1.05
2003 $0.68
2002 -$0.27

Earnings Per Share – Modern Graham 

2013 (estimate) $1.86
2012 $1.80
2011 $1.89
2010 $1.84
2009 $1.45
2008 $1.56

Conclusion:

Texas Instruments Incorporated is not suitable for the Defensive Investor after failing to adequately grow its earnings and trading at high PEmg and PB ratios.  However, the company may be suitable for the Enterprising Investor, who is willing to take on more risk than his Defensive Investor counterpart.  The company passes all of the requirements for the Enterprising Investor, and further research is therefore warranted.  From a valuation perspective, Texas Instruments has grown its EPSmg (normalized earnings) from $1.56 in 2008 to an estimated $1.86 for 2013.  This level of growth that has been achieved historically is not as high as the market’s implied estimate of over 7%.  As a result, the company appears to be overvalued at the present time.  Enterprising Investors should keep the company on a watch list in the hopes that earnings turn out to be higher than expected, thus raising the valuation, or the price lowers to a more intriguing level.

ModernGraham Valuations of related companies:

What do you think?  Do you agree that Texas Instruments Incorporated is overvalued?  Is the company suitable only for Enterprising Investors?  Leave a comment or mention @ModernGraham on Twitter to discuss.

If you like our valuations, why not check out ModernGraham Stocks & Screens?  It’s a great way to review the valuations while screening for things like low PE ratio, undervalued companies, etc.!

Disclaimer:  The author did not hold a position in Texas Instruments Incorporated at the time of publication and had no intention of entering into a position within the next 72 hours.

Photo Credit:  Andrew Magill

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