Semiconductors are by no means new technology, but even though they are a near-omnipresent part of life today, it's still a growth industry. If all-out innovation and growth within chips is what you're looking for, Texas Instruments (TXN 0.64%) isn't the right stock. However, this old stalwart still has plenty to offer, especially if striking a balance between growth and investment income is the name of your game.
A cool hand in tough times
A lot has changed in a matter of months. More than just a health and economic catastrophe, COVID-19 is creating a "new normal." Whatever that may look like after the dust settles is anyone's guess, but one early trend is emerging: Digital-based business is here to stay.
That bodes well for Texas Instruments (TI) and the rest of the industry. As the basic building blocks for all things tech, semiconductor companies haven't had the wind taken out of their sails by uncertain economic times. If anything, many of them have gotten a boost in demand. Fellow chip giant Broadcom said on its latest earnings call that it was having a hard time keeping up with orders in some segments of its business.
Granted, TI has a very different business model. Many of its end customers have been deeply impacted by the current crisis, most notably in the areas of auto and smartphone manufacturing. Auto and phone sales are seeing falling consumer interest at the moment, and a recovery may not happen for these two important segments until 2021. As a result, TI's first-quarter results showed year-over-year declines.
|
Metric |
Q1 2020 |
Q1 2019 |
Change |
|---|---|---|---|
|
Revenue |
$3.33 billion |
$3.59 billion |
(7.4%) |
|
Earnings per share |
$1.24 |
$1.26 |
(1.6%) |
|
Free cash flow |
$690 million |
$856 million |
(19.4%) |
Data source: Texas Instruments. Table by author.
However, as explained by my colleague Billy Duberstein, TI has been in crises before and dusted off its 2008 to 2009 Great Recession playbook during its first-quarter earnings call. The company's efficient production and big profit margins will go a long way toward helping it ride out the turbulence. And while the second quarter guidance wasn't great, a wide 22% to 4% expected sequential drop in revenue from last quarter could be worse.
Image source: Texas Instruments.
Generous cash returns
Back to the bottom line for a moment. Even in a bad quarter, TI generated $690 million in free cash flow (revenue less cash operating and capital expenses). It's a volatile quarterly metric, but it gives investors a true sense of how profitable a company is. And a 21% free-cash-flow margin in a bad quarter is nothing to balk at. Over the last 12 months, TI's free cash flow of $5.64 billion is good for a whopping margin of 40%.
Talk about efficiency. And where does all that cash go? The company keeps the equivalent of at least 10% of annual revenue in liquid assets. With $4.74 billion in cash and equivalents at the end of March 2020, that box is checked. As for the free cash flow itself, TI has a long-standing policy of returning all of it to shareholders. That comes in the form of a dividend (which currently yields 2.9% annually) and share buybacks (which totaled $1.64 billion in the first quarter). Those buybacks explain how earnings per share fell only 2% even though revenue fell 7%.
In spite of some expected headwinds for at least the rest of this year, it may be surprising that TI stock is close to breakeven with where it started 2020. And trading for 20.1 times trailing 12-month free cash flow doesn't exactly make it a value like it was back in late March during the worst of the market meltdown. Nevertheless, premium pricing goes with the territory. As the world eventually heals from the coronavirus, TI's business will rally. And along the way, it generates ample cash for research and development, the improvement of its chip manufacturing processes, and the return of excess capital to investors. If a stable income play in the tech industry is what you're after, this one is a worthy addition.
