Texas Instruments: Powering Technology Through Analog Chips
You might know Texas Instruments $TXN for its calculators, but you might not know that its most important segment is analog semiconductors:
After years of careful planning (and several divestments along the way), TI has positioned itself in automotive and industrial, the two fastest-growing segments in analog and embedded semiconductor content:
Analog chips differ from digital chips because they can process continuous variables from the real world. Digital chips work in binary form, so they always need an analog chip beside them to interpret variables such as pressure, temperature, proximity… No wonder industrial and automotive are two relevant end markets with substantial growth opportunities.
Analog chip omnipresence is appealing, but there’s more. Below you can find other reasons that make the industry appealing:
TI’s management is laser-focused on growth of FCF/share, as they believe this is the metric that best illustrates shareholder value creation. TI’s investor webpage opens up with the following quote:
Any investor should ask themselves the following:
Where will future growth in FCF/share come from?
In the past, TI had low revenue growth (due in part to divestments), but it managed to increase FCF/share nicely:
This was only possible thanks to improving margins, cash conversion efficiencies, and share reduction:
While there are further opportunities to continue improving the above metrics, TI’s management acknowledges that revenue growth will play an increasingly important role in future FCF/share growth.
To sustain higher future revenue, TI has started investing significantly in CapEx that will help support $34 billion in revenue by 2030:
Despite being a manufacturer, you can see that TI is not capital-intensive. This is only possible because analog chips don’t adhere to Moore’s law, which helps TI save substantially on equipment and R&D.
FCF per share growth is impressive, but a strong moat is paramount to its achievement. As Rich Templeton says:
If moats are real and not just nonsense on a Powerpoint, your FCF/share should grow faster than your best competitors.
TI enjoys a 6-pillar moat:
Analog Devices, TI’s main competitor, is trying to close some of these gaps by acquiring companies. However, the problem with growing through M&A is that product portfolios of most analog companies end up colliding. As a result, growing through acquisitions becomes increasingly arduous as one scales.
One of TI’s critical competitive advantages is internal manufacturing on 300mm wafers. Internal manufacturing allows the company to control its destiny and protects it against inflationary pressures. When competitors raise prices to maintain margins due to rising foundry prices, TI simply matches these prices while seeing most of it flow to the bottom line.
The company’s cost structure is also advantageous, as it manufactures on 300mm wafers, with the industry standard being 200mm wafers:
300mm wafers help more chips share the burden of fixed costs, thereby improving margins.
TI’s moat is strong, but management is undoubtedly its best trait. The C-suite's tenure averages 23 years, with CEO Rich Templeton serving 42 years:
One great area we can use to judge management is capital allocation. During Mr. Templeton’s tenure, TI has always followed a policy of giving back excess capital to shareholders.
TI has raised dividends for 19 consecutive years (23% CAGR):
Buybacks have been made episodically, showing that management will not repurchase its stock at any price:
Today, TI has an unused repurchase program of $23.2 billion (15% of market cap) with no expiry date. Fair to say that if the stock price decreases, management has shareholders covered.
If we look at TI’s historical ratios to judge its valuation, it would no doubt appear cheap on a PE basis and expensive on a P/FCF basis:
The divergence between both ratios comes from the current Capex cycle the company is undergoing, which puts downward pressure on FCF. However, this method would ignore that the semiconductor industry is highly cyclical, where the “E” and “FCF” are sometimes at risk.
I used an inverse DCF to see what’s baked into the price and judge whether it’s reasonable. The current price of $165 assumes the following:
Based on these assumptions, TI appears to be reasonably valued.
TI is the leader in an interesting industry expected to enjoy secular tailwinds. Management’s quality and capital allocation skills make me confident that the company will continue to win.
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