Does Texas Instruments Make a Good Buy?

Mark is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Anyone expecting Texas Instruments (NASDAQ: TXN) to have a very bumpy ride in 2013 will be sorely disappointed--the gradually-improving semiconductor space will not allow that to happen. Texas Instruments' second quarter results proved that the tech giant has no plans to go quietly into the night. If the company's business model continues to generate strong cash flows from operations, doubters will turn into believers.

Texas Instruments' performance cannot be analyzed without first understanding the company. It moved out of the wireless sector and became confronted with the swift global decline of the PC industry. It has not been the only victim, of course; the decline has also impacted on Intel, leading to the company's abysmal recent personal computer performance, with sales falling 7.5% year-on-year.

Ahead of Texas Instruments' latest report, the market expected that things would be rough. The opposite happened, however.

Quarter two was good, if not great

The Street was looking for earnings of $0.41 per share in the second quarter, while the company said its free cash flow would comprise 20-25% of revenues. The company further estimated that its revenue would grow 6% sequentially. It did not disappoint investors

For the second quarter, the company reported earnings per share of $0.58, beating Wall Street estimates. The free cash flow comprised 24% of revenue, which was consistent with the company's target. Texas Instruments also posted revenues that met its estimates, though it missed Wall Street targets. Despite a 9% revenue decline year-on-year, this should qualify as a commendable achievement if you consider the company's tough macroeconomic environment.

Operating margin also grew, improving around 12-16 points. The company's operating income also rose between 52% and 129%. The company said its profit was facilitated by a $0.16 gain per share related to the transfer of its wireless connectivity technology to a customer.

Of course, bears may point to the fact that the company's legacy wireless products declined to less than 5% of revenue and will go below 2% in the next quarter. Then again, what did they expect? The company understands its business. It grew in the backlog, analog, and embedded processing sectors. Its cash flow from operations also grew by 3%. The company is not spending frivolously, either; its capital expenditure declined by 28%.

Macroeconomic environment

It is worth considering the state of the company's surrounding macroeconomic environment, as it will show that its future is bright. The semiconductor market is going through an interesting phase. In their latest research study, "Global Semiconductor Market Outlook to 2017," RNCOS' analysts estimate that the market is slated to grow at a compound annual growth rate of 7.6% between 2013 and 2017. The growth in revenues will be driven by the increased demand for smartphones and tablets.

Fundamentals

Delving into fundamentals, Texas Instruments' beta and return on equity are competitive with rivals such as Qualcomm (NASDAQ: QCOM), which competes with Texas Instruments in the wireless connectivity market, and STMicroelectronics (NYSE: STM), which rivals TI in the microelectronics sensors sector. Texas Instruments' beta is 1.35. Investors are valuing STMicroelectronics (with a beta of 1.9) as more risky, though the same cannot be said of Qualcomm (with a beta of 1.09).

The company's return on equity follows a similar trend. Its return on equity is 18.63%, below the 18.76% from Qualcomm but higher than -32.90% return for STMicroelectronics. Texas Instruments' overall earnings per share growth is certain, as its next five-year's estimate of 9.0% is middle-of-the-road compared to Qualcomm (16.67%) and STMicroelectronics (5.0%).

Investors are also wise to look at the sentiments surrounding a company's five-year trailing growth. Again, Texas Instruments is at the middle-of-the-road with 15.07%, compared with 20.47% trailing growth from Qualcomm and 0.39% from STMicroelectronics.

Hedge fund managers

Though the company increased its revenues sequentially, it does seem possible that an imbalance of negative sentiments is surrounding it. This may be why the number of hedge fund managers invested in the company declined by 30% compared to a year earlier. Furthermore, only one insider purchased the stock within the period, compared with about 157 insider sales.

Conclusion

Ultimately, it is up to the investor to trust the fundamentals of the company. They reveal that the stock has bright prospects for the future, which is why Texas Instruments will be around for some time to come.

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Mark Girland has no position in any stocks mentioned. The Motley Fool owns shares of Qualcomm. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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