Texas Instruments' Valuation Captures Future Growth, Longbow Says In Neutral Initiation

Texas Instruments Incorporated TXN's business warrants a premium valuation, but after a strong appreciation in the stock over the past year, the valuation captures the company's strong outlook, according to Longbow. Research.

The Analyst

Longbow's Shawn Harrison initiated coverage of Texas Instruments with a Neutral rating and no assigned price target.

The Thesis

Texas Instruments boasts a strong business with a favorable outlook, most notably in the auto and industrial content segments, Harrison said in the Tuesday initiation note.

The company's annual sales rose at a 6.9-percent compounded annual growth rate from 2014 through 2017, while the broader analog industry's CAGR over the same time period was 6.2 percent, the analyst said. Texas Instrument's embedded sales rose at a CAGR of 8.5 percent versus just 1-percent growth in industry MCU sales, he said. 

Texas Instruments' gross margins are 700 basis points higher since 2014, and the company has the potential for another 300-basis-point expansion as 300mm utilization rises, the analyst said. 

Despite ongoing momentum and strength in the business, the stock's valuation needs to be considered in a rating decision, Harrison said. Shares of Texas Instrument are trading at 21x 2018E EPS and 19.7x 2018 free cash flow versus five-year averages of 21x and 17.3x. The stock is also trading at a 51-percent 2018 P/E premium to semi peers versus an average of 45 percent and 24 percent on 2018 P/FCF versus an average 4 percent premium, according to Longbow. 

Investors have already assigned Texas Instruments' stock with a "deserved premium valuation" that factors in a strong growth outlook, Harrison said. 

Price Action

Shares of Texas Instruments were trading lower by 0.25 percent at the time of publication Tuesday. 

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Photo courtesy of Texas Instruments.