Investors love stocks that consistently beat the Street without getting ahead of their fundamentals and risking a meltdown. The best stocks offer sustainable market-beating gains, with robust and improving financial metrics that support strong price growth. Does Texas Instruments (NASDAQ:TXN) fit the bill? Let's take a look at what its recent results tell us about its potential for future gains.

What we're looking for
The graphs you're about to see tell Texas Instruments' story, and we'll be grading the quality of that story in several ways:

  • Growth: Are profits, margins, and free cash flow all increasing?
  • Valuation: Is share price growing in line with earnings per share?
  • Opportunities: Is return on equity increasing while debt to equity declines?
  • Dividends: Are dividends consistently growing in a sustainable way?

What the numbers tell you
Now, let's take a look at Texas Instruments' key statistics:

TXN Total Return Price Chart

TXN Total Return Price data by YCharts

Passing Criteria

3-Year* Change 


Revenue growth > 30%



Improving profit margin



Free cash flow growth > Net income growth

25.7% vs. (29.3%)


Improving EPS



Stock growth (+ 15%) < EPS growth

51.5% vs. (23.5%)


Source: YCharts. * Period begins at end of Q1 2011.

TXN Return on Equity (TTM) Chart

TXN Return on Equity (TTM) data by YCharts

Passing Criteria

3-Year* Change


Improving return on equity



Declining debt to equity



Dividend growth > 25%



Free cash flow payout ratio < 50%



Source: YCharts. * Period begins at end of Q1 2011.

How we got here and where we're going
Texas Instruments has fallen far from last year's six-of-nine performance, as it racks up a disappointing three out of nine passing grades today. Since we last examined it, the company has lost ground on the top line and on the bottom line, but its share price continues to advance regardless as yield-hungry investors chase a fast-growing dividend payout. Can Texas Instruments regain its stride on the fundamental side and justify investors' present faith in it, or will a stock that's grown entirely on valuation expansion become a long-term laggard? Let's dig a little deeper to find out.

Texas Instruments is gradually moving toward the end of a major restructuring, which was well-known last year when we first assessed it. Since the company moved out of mobile chip development, it's seen fundamentals decline as its other business lines struggle to make up the difference. Its core products, which include embedded processors and analog chips, have enjoyed solid growth in a relatively mature industry, but Texas Instrument's greatest opportunity has yet to explode the way mobile chips have as billions worldwide become smartphone owners.

That opportunity, which is particularly appealing for embedded chipmakers, is the Internet of Things, which is thought to require billions of new chips to connect "things" of all sorts to the Internet by 2020. Texas Instruments has specifically targeted the Internet of Things as a source of future growth, and an interview Fool reporter Rex Moore recently conducted with TI SVP Kent Novak highlights the company's advantages in this nascent technology segment.

Embedded processor sales remain low-margin, as might be expected in a highly competitive and fast-growing field. But Fool writer Srdjan Bejakovic points out that the company's target of 30% operating margins in embedded processors is attainable if revenue grows quickly, due to high fixed costs in facilities and R&D that are currently weighing down the segment's profitability. When you consider the fact that Texas Instruments is currently cheaper than most of its analog or embedded-processor peers on both a P/E and price-to-free-cash-flow basis, it makes sense to be patient while the company continues to execute its pivot:


P/E (trailing)

P/E (forward)

Price to Free Cash Flow

Texas Instruments




Analog Devices




Avago Technologies








Freescale Semiconductor




Source: YCharts

Even though Texas Instruments' forward P/E is better than all but one competitor, it still falls behind the pack in terms of projected growth rates -- its expected EPS growth of 12.9% for 2015 is barely a third of Avago's (NASDAQ:AVGO) 32.1% expected EPS growth, and Atmel's (NASDAQ: ATML) projected 40.9% EPS growth for 2015 is even further out in front. Luckily for patient investors, Texas Instruments remains both highly profitable and extremely committed to rewarding shareholders with both dividends and buybacks. The company's dividend growth has been top-notch, and the company effectively returned all its free cash flow to shareholders last year between these payouts and share repurchases. But share-price growth has pushed TI well into "fairly valued" territory, according to Fool value investor Chuck Saletta, who holds TI shares in his inflation-protected income growth portfolio. Current investors have no real reason to sell, but those in search of a new stock for their portfolios may be better served elsewhere.

Putting the pieces together
Today, Texas Instruments has few of the qualities that make up a great stock, but no stock is truly perfect. Digging deeper can help you uncover the answers you need to make a great buy -- or to stay away from a stock that's going nowhere.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.