The Texas Instruments Bull Thesis Continues To Play Out

Texas Instruments Incorporated TXN's third-quarter earnings report on Tuesday should signal to investors the bullish case for owning the stock remains strong.

JPMorgan's Harlan Sur maintains an Overweight rating on Texas Instruments' stock and boosted the price target from $95 to $110.

Texas Instruments' earnings report was highlighted by continued growth in revenue, margins and free cash flow, while demand trends across all of its target markets continue to be strong, especially in the automotive and industrial segments, Sur said in a Wednesday note. (See Sur's track record here.) 

Investors shouldn't be concerned with the company's fourth-quarter revenue guidance, which calls for a 10 percent sequential drop — worse than a normal seasonality of 7 percent, the analyst said. Management did acknowledge during the post-earnings conference call that demand trends remain strong, so there is likely some conservatism baked into the guidance, as fourth-quarter visibility is always lower and dependent on sell-through by end-customers.

Distribution inventories were flat at four weeks; overall lead times remain normal and stable, and order cancellation levels remain low, Sur said.

This signals that Texas Instruments' supply-side trends are "disciplined" and there are no signs of "overheating" to be found, the analyst said. 

Investors should remain bullish on Texas Instruments for several key reasons, iaccording to JP Morgan:

• Margin and earnings upside.
• Favorable product and end market diversification.
• Free cash flow margin (29 percent for the next 12 months) expansion.
• A superior capital return strategy compared to peers.

Jefferies: Thesis Playing Out

Texas Instruments' better-than expected-revenue and margins are consistent with the entire semiconductor sector, Jefferies' Mark Lipacis said in a research report. Investors who think the stock has peaked may be mistaken as the bullish thesis continues to play out, the analyst said. 

Lipacis maintains a Buy rating on Texas Instruments' stock and raised the price target from $110 to $111. Investors should use any weakness as a buying opportunity, Lipacis said. 

"Our analysis of the analog industry suggests consolidation is driving higher profitability among analog companies, more so than cyclical factors," he said. "We expect this industry to consolidate further as it matures, providing a secular upward bias to TXN's profitability."

Finally, secular and cyclical factors will continue to drive demand higher, Lipacis said. For example, the continued growth in demand for Internet of Things (IoT) devices along with artificial intelligence technologies will benefit analog stocks moving forward, the analyst said. 

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Photo courtesy of Texas Instruments.