Benjamin Graham taught that Intelligent Investors must do a thorough fundamental analysis of investment opportunities to determine their intrinsic value and inherent risk. This is best done by utilizing a systematic approach to analysis that will provide investors with a sense of how a specific company compares to another company. By using the ModernGraham method one can review a company’s historical accomplishments and determine an intrinsic value that can be compared across industries. What follows is a specific look at how Texas Instruments fares in the ModernGraham valuation model.
Company 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. In December 2013, TI acquired a building in the Chengdu Hi-Tech Zone from UTAC Chengdu Ltd.
Defensive Investor – must pass at least 6 of the following 7 tests: Score = 4/7
- Adequate Size of Enterprise – market capitalization of at least $2 billion – PASS
- Sufficiently Strong Financial Condition – current ratio greater than 2 – PASS
- Earnings Stability – positive earnings per share for at least 10 straight years – PASS
- Dividend Record – has paid a dividend for at least 10 straight years – PASS
- 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
- Moderate PEmg ratio – PEmg is less than 20 – FAIL
- 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
- Sufficiently Strong Financial Condition, Part 1 – current ratio greater than 1.5 – PASS
- Sufficiently Strong Financial Condition, Part 2 – Debt to Net Current Assets ratio less than 1.1 – PASS
- Earnings Stability – positive earnings per share for at least 5 years – PASS
- Dividend Record – currently pays a dividend – PASS
- Earnings growth – EPSmg greater than 5 years ago – PASS
|Value Based on 3% Growth||$27.09|
|Value Based on 0% Growth||$15.88|
|Market Implied Growth Rate||7.98%|
|Net Current Asset Value (NCAV)||-$0.10|
Balance Sheet – 12/31/2013
Earnings Per Share
Earnings Per Share – ModernGraham
Texas Instruments should be on the watch list of any Enterprising Investor, as the company passes all of the requirements of the investor type. However, the company does not qualify for the Defensive Investor due to insufficient earnings growth over the ten year period, and high PEmg and PB ratios. As a result, Enterprising Investors should feel comfortable proceeding with further research while Defensive Investors may wish to look into other opportunities such as through a review of 5 Outstanding Dow Components or 5 Low PEmg Companies for the Defensive Investor. From a valuation perspective, the company appears to be overvalued at the present time, due to the low earnings growth. The company has only grown its EPSmg (normalized earnings) from $1.45 in 2009 to $1.87 for 2013, and this level of historically demonstrated growth does not support the market’s implied estimate of 7.98% earnings growth. This leads the ModernGraham valuation model to return an estimate of intrinsic value that falls below the market price.
The next part of the analysis is up to individual investors, and requires discussion of the company’s prospects. What do you think? What value would you put on Texas Instruments (TXN)? Where do you see the company going in the future? Is there a company you like better? Leave a comment on our Facebook page or mention @ModernGraham on Twitter to discuss.
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Disclaimer: The author did not hold a position in Texas Instruments (TXN) or any of the other companies listed in this article at the time of publication and had no intention of changing that position within the next 72 hours.
Logo taken from the Wikipedia; this article is not affiliated with the company in any manner.