Is Texas Instruments the Perfect Stock?

Everyone would love to find the perfect stock. But will you ever really find a stock that gives you everything you could possibly want?

One thing's for sure: If you don't look, you'll never find truly great investments. So let's first take a look at what you'd want to see from a perfect stock, and then decide if Texas Instruments (NYSE: TXN  ) fits the bill.

The quest for perfection
When you're looking for great stocks, you have to do your due diligence. It's not enough to rely on a single measure, because a stock that looks great based on one factor may turn out to be horrible in other ways. The best stocks, however, excel in many different areas, which all come together to make up a very attractive picture.

Some of the most basic yet important things to look for in a stock are:

  1. Growth. Expanding businesses show healthy revenue growth. While past growth is no guarantee that revenue will keep rising, it's certainly a better sign than a stagnant top line.
  2. Margins. Higher sales don't mean anything if a company can't turn them into profits. Strong margins ensure a company is able to turn revenue into profit.
  3. Balance sheet. Debt-laden companies have banks and bondholders competing with shareholders for management's attention. Companies with strong balance sheets don't have to worry about the distraction of debt.
  4. Money-making opportunities. Companies need to be able to turn their resources into profitable business opportunities. Return on equity helps measure how well a company is finding those opportunities.
  5. Valuation. You can't afford to pay too much for even the best companies. Earnings multiples are simple, but using normalized figures gives you a sense of how valuation fits into a longer-term context.
  6. Dividends. Investors are demanding tangible proof of profits, and there's nothing more tangible than getting a check every three months. Companies with solid dividends and strong commitments to increasing payouts treat shareholders well.

With those factors in mind, let's take a closer look at Texas Instruments.

Factor

What We Want to See

Actual

Pass or Fail?

Growth 5-Year Annual Revenue Growth > 15% 2% fail
  1-Year Revenue Growth > 12% 35.6% pass
Margins Gross Margin > 35% 53.6% pass
  Net Margin > 15% 21.9% pass
Balance Sheet Debt to Equity < 50% 0% pass
  Current Ratio > 1.3 3.52 pass
Opportunities Return on Equity > 15% 30.3% pass
Valuation Normalized P/E < 20 14.36 pass
Dividends Current Yield > 2% 1.7% fail
  5-Year Dividend Growth > 10% 36.9% pass
       
  Total Score   8 out of 10

Source: Capital IQ, a division of Standard and Poor's. Total score = number of passes.

You don't need one of Texas Instruments' landmark scientific calculators to figure out that a score of 8 is pretty good. Even more impressive is the massive transformation going on at the company right now.

Until recently, Texas Instruments earned a substantial part of its revenue by making chips to help cell phones connect to cellular networks. With Nokia (NYSE: NOK  ) as a primary customer, the company was at risk from relying heavily on the lower-margin market, where competitors such as Broadcom (Nasdaq: BRCM  ) and Qualcomm (Nasdaq: QCOM  ) abound. Now, though, Texas Instruments is moving more into more profitable opportunities, including analog and embedded chips. Although investors are nervous about losing the baseband cell-chip revenue, Texas Instruments' strategic move could improve margins well into the future.

Still, Texas Instruments has to watch for competitors, especially among smaller niche players. Cirrus Logic (Nasdaq: CRUS  ) , for instance, makes high-quality audio chips for mobile devices that compete against Texas Instruments offerings. With premium devices gaining popularity, Texas Instruments can expect that other niche companies will try to invade its space.

Just looking at the company's recent numbers, it's clear that growth has already started to pick up after being stagnant the past five years. With a rapidly rising dividend, Texas Instruments could count itself among the rare class of stocks that score a perfect 10 in a few years.

Keep searching
No stock is a sure thing, but some stocks are a lot closer to perfect than others. By looking for the perfect stock, you'll go a long way toward improving your investing prowess and learning how to separate the best investments from the rest.

Click here to add Texas Instruments to My Watchlist, which can find all of our Foolish analysis on it and all your other stocks.

Fool contributor Dan Caplinger doesn't own shares of the companies mentioned in this article. The Fool owns shares of Cirrus Logic, Qualcomm, and Texas Instruments. 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.


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