Numbers can lie -- yet they're the best first step in determining whether a stock is a buy. In this series, we use some carefully chosen metrics to size up a stock's true value based on the following clues:

  • The current price multiples.
  • The consistency of past earnings and cash flow.
  • How much growth we can expect.

Let's see what those numbers can tell us about how expensive or cheap Texas Instruments (NYSE: TXN) might be.

The current price multiples
First, we'll look at most investors' favorite metric: the P/E ratio. It divides the company's share price by its earnings per share (EPS) -- the lower, the better.

Then we'll take things up a notch with a more advanced metric: enterprise value to unlevered free cash flow, which divides the company's enterprise value (basically, its market cap plus its debt, minus its cash) by its unlevered free cash flow (its free cash flow, adding back the interest payments on its debt). As with the P/E, the lower this number is, the better.

Analysts argue about which is more important -- earnings or cash flow. Who cares? A good buy ideally has low multiples on both.

Texas Instruments has a P/E ratio of 11.8 and an EV/FCF ratio of 14.5 over the trailing 12 months. If we stretch and compare current valuations with the five-year averages for earnings and free cash flow, we see that Texas Instruments has a P/E ratio of 14.3 and a five-year EV/FCF ratio of 14.2.

A positive one-year ratio of less than 10 for both metrics is ideal (at least in my opinion). For a five-year metric, less than 20 is ideal.

Texas Instruments has a mixed performance in hitting the ideal targets, but let's see how it stacks up against some of its competitors and industry mates. 

Company

1-Year P/E

1-Year EV/FCF

5-Year P/E

5-Year EV/FCF

Texas Instruments 11.8 14.5 14.3 14.2
Analog Devices 12.4 10.2 17.3 12.4
Maxim Integrated Products 15.2 11.2 28.6 19.6
NVIDIA 13.5 7.1 27.1 11.8

Source: S&P Capital IQ; NM = not meaningful because of losses.

Numerically, we've seen how Texas Instruments' valuation rates on both an absolute and relative basis. Next, let's examine ...

The consistency of past earnings and cash flow
An ideal company will be consistently strong in its earnings and cash-flow generation.

In the past five years, Texas Instruments' net income margin has ranged from 9.3% to 21.9%. In that same time frame, unlevered free cash flow margin has ranged from 16.8% to 23.8%.

How do those figures compare with those of the company's peers? See for yourself:

Txn

Source: S&P Capital IQ; margin ranges are combined.

In addition, over the past five years, Texas Instruments has tallied up five years of positive earnings and five years of positive free cash flow.

Next, let's figure out ...

How much growth we can expect
Analysts tend to comically overstate their five-year growth estimates. If you accept them at face value, you will overpay for stocks. But even though you should definitely take the analysts' prognostications with a grain of salt, they can still provide a useful starting point when compared with similar numbers from a company's closest rivals.

Let's start by seeing what this company's done over the past five years. In that time period, Texas Instruments has put up past EPS growth rates of 8.2%. Meanwhile, Wall Street's analysts expect future growth rates of 10.3%.

Here's how Texas Instruments compares with its peers for trailing-five-year growth:

Txn

Source: S&P Capital IQ; EPS growth shown.

And here's how it measures up with regard to the growth analysts expect over the next five years:

Txn

Source: S&P Capital IQ; estimates for EPS growth.

The bottom line
The pile of numbers we've plowed through has shown us the price multiples that shares of Texas Instruments are trading at, the volatility of its operational performance, and what kind of growth profile it has -- both on an absolute and a relative basis.

The more consistent a company's performance has been and the more growth we can expect, the more we should be willing to pay. We've gone well beyond looking at an 11.8 P/E ratio, and we see that all of its price multiples are in the moderate-to-cheap range. That said, its peers are priced roughly similarly depending on the metric you look at. TI's past margins have been consistent and solid, and recent growth has been decent.

Although some of its peers also have interesting numbers, TI's numbers are pretty good all around. Our CAPS community seems to agree with the initial numbers, giving Texas Instruments four stars out of five.

But these initial numbers are just a start. If you find Texas Instruments' numbers or story compelling, don't stop here. Continue your due-diligence process until you're confident one way or the other. As a start, add it to My Watchlist to find all of our Foolish analysis.

I wrote about a stock that's flying under the radar in our brand new free report: "The Stocks Only the Smartest Investors Are Buying." I invite you to take a free copy to find out the name of the company I believe Warren Buffett would be interested in if he could still invest in small companies.