What's Going On With Texas Instruments Stock After Activist Elliott Bags $2.5B Stake?

Zinger Key Points
  • Elliott's $2.5 billion investment in Texas Instruments urges dynamic Capex strategy for improved free cash flow.
  • Texas Instruments faces pressure to revise Capex plans as Elliott highlights sharp decline in free cash flow metrics.
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Texas Instruments Incorporated TXN shares are trading slightly higher on Tuesday.

Elliott, renowned for shareholder activism and with assets totaling $65 billion, has invested more than $2.5 billion in Texas Instruments, according to a press release. The investor sent a letter to the Board of Directors of Texas Instruments.

The hedge fund advocates for enhanced free cash flow through a more flexible approach to capital expenditures, CNBC reported

For 12 months ended March 31, Texas Instruments’ free cash flow totaled $940 million, down 79% year over year. Free cash flow as a percentage of revenue contracted to 5.6% from 22.6% in the year-ago period.

According to a 13-page letter that CNBC reviewed, Elliott suggests Texas Instruments adopt a “dynamic capacity-management strategy.” 

This approach could potentially raise free cash flow to over $9 per share by 2026, exceeding current analyst consensus by around 40%.

Elliott contends that Texas Instruments’ strict adherence to a capital expenditure plan since 2022 has significantly diminished shareholder returns, notably reducing a key metric the company has historically emphasized – free cash flow, the report added.

Elliott points out a drastic decline in Texas Instruments’ free cash flow, from $6.40 per share in 2022 to an anticipated $1.83 per share this year. This erosion has deterred investors despite the company’s leadership in supplying analog chips to automotive and industrial sectors, per CNBC. Consequently, Elliott asserts that Texas Instruments’ stock performance has lagged behind its peers significantly over the past two, four, six, and ten years.

Elliott’s letter highlights concerns over Texas Instruments’ 2022 capital expenditure plan, which aims to significantly increase Capex spending to $5 billion annually from 2023-2026. 

This plan represents a substantial shift from previous spending levels, reaching up to 23% of revenues. However, Elliott argues that the anticipated surge in capacity could lead to excess levels, projecting 50% above consensus revenue expectations by 2026 and 2030, according to CNBC. 

The letter, penned by Jesse Cohn and Jason Genrich, advocates for a more dynamic approach to Capex to better align with market demand, emphasizing the need for prudent capital discipline. 

Despite its critique, the letter adopts a less confrontational tone than typical for Elliott, suggesting a less aggressive stance towards management and the board in the near future, CNBC added.

In its first-quarter earnings report, Texas Instruments said it expects second-quarter revenue of $3.65 billion to $3.95 billion against the consensus of $3.81 billion. The company anticipated second-quarter earnings of $1.05 to $1.25 per share versus estimates of $1.16 per share.

Price Action: TXN shares are trading higher by 0.39% to $199.97 at last check Tuesday. 

Disclaimer: This content was partially produced with the help of AI tools and was reviewed and published by Benzinga editors.

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