Despite Macro Weakness, Texas Instruments Likely Maintained Solid Momentum In Q4’15

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TXN: Texas Instruments logo
TXN
Texas Instruments

Leading analog chip maker, Texas Instruments  (NASDAQ:TXN) is expected to report its Q4 2015 earnings on January 27th. Despite the prevailing macro-economic weakness, we believe that the company likely sustained solid momentum in Q4, posting growth in core bueinsses even as total revenues were off a modest 2%. TI has exposure to a broad range of segments such as medical devices, wireless infrastructure, space, avionics and defense, which are generally unaffected by macro headwinds. However, the company can see a decline in the sales from personal electronics segment, which contributed 29% to the overall revenue in 2014. Nevertheless, we believe that the short-term headwind is more of a macro issue and TI’s fundamentals remain strong. The company continues to strengthen its analog ICs and embedded processing portfolio, which combined with an efficient manufacturing operation and a broad sales channel, should drive its long-term growth.

Our price estimate of $51 for Texas Instruments is close the current market price.

See our complete analysis for Texas Instruments stock here

A Strong Analog Portfolio And Healthy Gross Margins Can Help Sustain Growth Momentum

TI is rapidly penetrating in fast growing markets such as automotive and industrial machines. We believe that a strengthening analog portfolio will enable the company to retain, or even marginally increase, its market share over the next few years. The company currently accounts for approximately 18% of the analog semiconductor market.

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Also, TI has seen a significant improvement in gross margins from 52.1% in 2013 to 58.2% in Q2 2015 (despite the slow top line growth), though it remained flat in Q3 2015. Some of the key factors that have enabled TI to improve its gross margins include increased factory load-ins, improved manufacturing efficiency, and an improved product portfolio focused on analog, high performance analog and embedded processing.

In the coming quarters, the company can continue to see improvement in gross margin as an increasing proportion of its production is moving to 300 millimeter, which offers up to 40% chip cost benefit from an overall cost of goods standpoint. In addition, TI continues to see an increasing revenue contribution from the industrial and automotive markets, which generally tend to offer higher gross margins as well.

Semiconductor Cyclicality Can Affect TI’s Performance Materially

TI performance can be negatively impacted by the ongoing slowdown in semiconductor chip space. The Consumer Technology Association (CTA) of the U.S forecasts a two percent drop in global consumer electronics spending in 2016, owing primarily to a weaker Chinese economy and a reduced forecast for smartphone sales. The company had 44% exposure to China in 2014. Due to the aforementioned factor, TI can see a decrease in its shipment volumes. And since the company has its own manufacturing capacity, operating costs remain fixed and a decline in shipment volumes will weigh heavy on its gross margins. However, unlike other chip manufacturers that are primarily dependent on mobile phone sales and can witness a weak year as the smartphone sales slowdown, TI can continue to retain its growth momentum as it had exited the smartphone application processor market in 2012 to focus on other high growth areas such as automotive communications.

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