Texas Instruments $TXN
A calculated compounding machine
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“…growth of free cash flow per share is the primary driver of long-term value.”
Texas Instruments is well known for their graphing calculators like the TI-83 plus model shown below. That is a tiny percentage of what the business does today but it is what most people know as its the consumer facing product. The business makes thousands of different analogue chips and embedded processors (semiconductors). The company has been around for decades (originally Geophysical Services Inc. in 1930 and changed to Texas Instruments in 1951) but have focused heavily in the semiconductor chips and processors business since 2011 when it bought National Semiconductor for $6.5 billion.
The stock trades on the NASDAQ under the symbol TXN. It has a market cap of $138 billion USD and an enterprise value of $136 billion. It is a well known business that has had a 10 year return of ~20% per year (including dividends).
Let’s take a deeper look at the business and management quality, growth prospects, investment and business risks, and a take on valuation.
What They Do
They design, manufacture, and sell analogue chips and embedded processors to multiple industries. The automotive, industrial, and personal electronics segments make up the majority. They have a relatively large number of distinct product offerings and many customers across the globe.
The majority of of their products are manufactured, tested and assembled in house which makes the business more integrated compared to a lot of the competitors.
Analogue chips handle things digital ones can’t (varying voltage levels, namely). They do power management, read voltages from sensory equipment and communication signals. They are normally cheaper and less high tech and change at a slower pace compared to their digital brethren. These are the boring old tech that some people think are dead. The truth is that there will be more and more need for analogue as the world moves to a connected, digital world with sensors and connections for everything, everywhere. Because the tech changes less quickly, building out analogue manufacturing is cheaper and longer lasting. The product catalogues don’t get stale quickly and the products stay in the end product for the lifecycle (i.e.. years for things like automotive and industrial systems).
Gross margins have been increasing steadily towards 70% and returns on equity have been as well. There is no doubt that quantitatively, this is a high quality business. The balance sheet is strong with interest coverage at 55X and debt to equity at 0.6.
I will start with this return on equity chart and try to offer some insights as to why the business quality is what it is today and where it might be in the future.
Vast Product Offerings
When it comes to supply, Texas Instruments (TI) wallops a lot of the competition with the shear number of offerings. This can be an advantage when the product like