Texas Instruments Earnings: Numbers Investors Need to Watch

Texas Instruments (TXN -2.44%) often flies under the radar. But this chipmaker has established a strong competitive position, and shareholders have been well rewarded. In this Backstage Pass video, which aired Sept. 29, 2021, Motley Fool contributor Trevor Jennewine discusses the numbers investors need to watch when Texas Instruments reports earnings later this month. The company is expected to report earnings on Oct. 26.

Trevor Jennewine: Texas Instruments, for anybody that's not familiar with the company there is semiconductor manufacturer. And what they make are analog chips and embedded processing products.

Analog chips, probably something not many people are familiar with the this convert real-world signals, like sound and temperature ended digital data that can be used by other types of semiconductors. Then embedded processing products, they're typically designed to perform a dedicated task in an electronic device like powering a calculator, a electric toothbrush, or a microwave. So analog chips are in all electronic products; embedded processing products are in most. And then one of the things I really like about Texas Instruments, I'll come back to this, but they have their own manufacturing facilities and they have a just incredibly diverse product portfolio, 80,000 different products, a 100,000 different customers across a range of industries: industrial, automotive, personal electronics.

To set the stage, last quarter, things have been going well for this company. Revenue came in at $4.6 billion and that was up 41%. They posted $2.05 earnings per diluted share and that was up 39%, and then quarterly free cash flow was $1.7 billion and that was up 9%. So, going into the next quarter, management is expecting $4.4 billion  to $4.76 billion in revenue, that's up 25% at the high end. Then earnings per diluted share of a $1.87 to $2.13, up 47% at the high end.

Over the last year, the stock has been a market beater. The market caught up recently, but Texas Instruments has pulled ahead in the last month or so. The things that I am going to be focusing on when management reports earnings are, first, their commentary on the supply and demand with the global semiconductor shortage. This is been a frequent topic during earnings calls, the fact that they own their own manufacturing facilities, including wafer fabrication, and assembly and testing plants -- that gives Texas Instruments a significant advantage.

They're able to control their inventory much more tightly than if they didn't own those plants, and so throughout the supply chain, the supply problems with semiconductors, they spoke pretty optimistically about their ability to meet customer demand. So I'd be looking to hear what management has to say, see if there's still and a similarly strong position as of the most recent quarter and building on the fact that they own wafer fabrication facilities, one of their advantages as they currently have to 300-millimeter production facilities, and 300 millimeter production refers to the size of the silicon wafer on which the integrated circuits are made. So it's basically a circle, 300 millimeters is the size and most of their competitors are using a 200-millimeter process, and essentially, if you upped that to 300 millimeters, it allows you to produce chips at 40% less per chip, according to management. So they have a cost advantage there, and like I said, they had two of those wafer fabrication facilities that have a 300-millimeter process right now and they just bought a third one from Micron and they are building a fourth one in Texas. So we'll be looking to see what management has to say about that deal and how the construction process is going on the plant in Texas.

Then one of the great things that I'm sure shareholders love about this company is that they have raised their dividend consistently for 17 consecutive years, and they've raised it at a compound annual growth rate of 26%. They just announced another 13% increase, the dividend is now $1.15 per share, and so I'll be paying attention to free cash flow just to make sure that they can continue to fund that dividend. The payout ratio is currently around 54%, I believe, which just looks at how much are they paying out in dividends divided by what is the net income. So we still have plenty of room to continue boosting that. But the management has been very focused on returning cash to shareholders in the form of stock buybacks and dividend payments, and so paying attention to free cash flow just to make sure they can continue to fund those efforts. I think that's important to watch.