Has Texas Instruments Become the Perfect Stock?

Every investor would love to stumble upon the perfect stock. But will you ever really find a stock that provides everything you could possibly want?

One thing's for sure: You'll never discover truly great investments unless you actively look for them. Let's discuss the ideal qualities of a perfect stock, then decide if Texas Instruments (NASDAQ: TXN  ) fits the bill.

The quest for perfection
Stocks that look great based on one factor may prove horrible elsewhere, making due diligence a crucial part of your investing research. The best stocks excel in many different areas, including these important factors:

  • 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.
  • Margins. Higher sales mean nothing if a company can't produce profits from them. Strong margins ensure that company can turn revenue into profit.
  • Balance sheet. At debt-laden companies, banks and bondholders compete with shareholders for management's attention. Companies with strong balance sheets don't have to worry about the distraction of debt.
  • Money-making opportunities. Return on equity helps measure how well a company is finding opportunities to turn its resources into profitable business endeavors.
  • Valuation. You can't afford to pay too much for even the best companies. By using normalized figures, you can see how a stock's simple earnings multiple fits into a longer-term context.
  • Dividends. For tangible proof of profits, a check to shareholders every three months can't be beat. 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%

(0.7%)

Fail

 

1-Year Revenue Growth > 12%

(4.1%)

Fail

Margins

Gross Margin > 35%

49.7%

Pass

 

Net Margin > 15%

13.5%

Fail

Balance Sheet

Debt to Equity < 50%

49.9%

Pass

 

Current Ratio > 1.3

2.51

Pass

Opportunities

Return on Equity > 15%

16.0%

Pass

Valuation

Normalized P/E < 20

17.89

Pass

Dividends

Current Yield > 2%

3.0%

Pass

 

5-Year Dividend Growth > 10%

23.2%

Pass

       
 

Total Score

 

7 out of 10

Source: S&P Capital IQ. Total score = number of passes.

Since we looked at Texas Instruments last year, the company hasn't been able to get back the point it lost from 2010 to 2011, with margins falling despite lower debt levels. The stock hasn't done well either, losing about 5% over the past year.

Texas Instruments is a giant in the semiconductor industry. With a well-diversified customer base, TI serves up a wide range of products for everything from automobiles to mobile devices.

But Texas Instruments has largely found itself locked out of the most lucrative growth markets. Apple (NASDAQ: AAPL  ) and Samsung use in-house chips to power their devices, while most other smartphone and tablet opportunities have already gotten snapped up by NVIDIA (NASDAQ: NVDA  ) and Qualcomm (NASDAQ: QCOM  ) . TI managed to grab a spot in Amazon.com's (NASDAQ: AMZN  ) Kindle Fires, and their market share has been on the rise, but a new wave of devices could reverse that trend.

As a result, Texas Instruments is making a huge strategic shift. Last week, TI said it would make some heavy cost-cutting moves and switch its focus away from mobile processors toward new technology like embedded applications. That may be a more realistic way to move forward, but it could also result in a massive loss of talent at TI to competitors like Apple.

For TI to improve, it will need to have its new plans bear fruit quickly. Despite an impressive dividend yield, TI needs to get revenue moving in the right direction again and work on improving margins if it ever wants to get over the final hurdles toward becoming a perfect stock.

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 out the best investments from the rest.

Analysts may argue about the future of Texas Instruments, but there is absolutely no argument that Apple is at the center of technology's largest revolution ever, and that longtime shareholders have been handsomely rewarded with over 1,000% gains. However, there is a debate raging as to whether Apple remains a buy. The Motley Fool's senior technology analyst and managing bureau chief, Eric Bleeker, is prepared to fill you in on both reasons to buy and reasons to sell Apple, and what opportunities are left for the company (and more importantly, your portfolio) going forward. To get instant access to his latest thinking on Apple, simply click here now.

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


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