Leandro's avatar
$131.5m follower assets
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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There’s a 750-word limit, so I couldn’t cover as much as I would’ve liked to. Don’t hesitate to leave any doubt in the comments section and upvote the post if you enjoyed it!

Btw, I cover $TXN in depth in my research service Best Anchor Stocks. If interested, there's a two-week free trial (you can cancel if you don't like what you see) which you can access here: https://seekingalpha.com/mp/1399-best-anchor-stocks/articles

Thanks!
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Leandro's avatar
$131.5m follower assets
Capital Returns part 2: Growth and Value
Last week, I uploaded a post on some topics discussed in the book Capital Returns. You can read that post here.

This week, I did the second part, which you can find below. Hope you enjoy it and if you do be sure to leave an upvote and a comment with your thoughts!

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The theory of the Capital Cycle states that returns mean revert once capital and competition flood into an industry.

However, some elite companies are able to repel competition for very long periods, delaying mean reversion longer than the market expects

Growth eventually becomes value after an industry is flooded with capital

"One person's growth stock is another's value stock."

This is a known fact, but stocks should not be grouped as growth or value. If the market is inefficient valuing their future growth prospects, there's always value, irrespective of growth.

Long term investors have less competition than short term "investors" because they tend to ask the right questions and focus on what's important. There's a lot of data out there, but not all is really relevant for the LT

Asking the right questions helps tune out the noise.

Short term data points have fierce competition, as Wall Street relies on short termism to make money

Industries where there is an agent between the seller and the end customer can be profitable for investors, as the seller can bribe the agent to exploit consumer ignorance

"Customers will often pay more when agents are involved."

Historically, semiconductors have been very exposed to capital cycles.

I highly doubt it will be different this time, but I wrote an article not long ago talking about why $ASML might be protected. You can find it here.

Despite semiconductor cycles, the analog industry has managed to provide less-volatile returns, aided by low capital intensity. $TXN $ADI

One of the reasons for outperformance is the strong moat enjoyed by analog companies.

First, the talent pool is constrained and rather static, making it difficult for a new entrant to compete in R&D

The analog industry is diversified across end markets and products typically make up a small portion of the customer's budget.

This last part, joint with the high barriers of entry, gives the companies pricing power as competition is based on quality, not price

When prices make a small part of a customer's total costs, there's pricing power. The product should also be mission critical and switching costs must be high

"Intrinsic pricing power is created when price is not the most important factor in a customer's purchase decision."

A technological moat can appear to be stronger than it really is, so it must be combined with other competitive advantages.

Take for example $ASML, the moat is not only tech but also the complexity of the supply chain and its exclusivity agreements with critical suppliers

Despite mean reversion risk, higher rates of return are typically safer than lower rates

ST investors should not worry too much about high returns, as other things (macro, news...) will move the stock over their holding period.

LT investors should care quite a bit, though. Over the LT, macro and news matter less for high quality companies and returns take over

The problem in focusing on P/E ratios is that all earnings are seen as equal, when in reality earnings are worth more when ROIC and FCF conversion are higher

Pick one:
  1. P/E = 15, FCF conversion = 90%, ROIC = 25%
  2. P/E = 15, FCF conversion = 60%, ROIC = 15%

Indispensable products in unglamorous activities might be a good fishing pond for two reasons:

  1. Customers don't typically focus on price
  2. Unglamorous means that capital is more likely to be absent, reducing competition

Some examples of industries with the above characteristics

  1. Analog semis
  2. Payroll processing companies
  3. CAD / CAM
  4. Flavor and fragrance companies
  5. Specialty chemical
  6. Laboratory supplies

Leaders in the above industries tend to appear to be "fully-priced", but this is rarely the case as the market tends to estimate a faster mean reversion.

Hope you enjoyed the post!
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Stock Repurchase
There are multiple ways in which companies can create value for their shareholders, one of them is by buying back stocks in the open market.

This reduces the amount in circulation, which increases the price of each share now outstanding.

Some incredible examples:

  • $AAPL Apple has bought around 40% the shares outstanding in the past decade, spending over 500bn dollars.

  • $TXN Since 2004, Texas Instruments has bought back more than 50% of shares outstanding, spending over 48bn dollars

  • $SHW Since 1984, Sherwin Williams has been steadily buying back its shares. It now has bought 54% of the shares outstanding.

Some share repurchase plans looking forward:

$PYPL 10bn
$NVDA 12bn

And keep an eye on $GOOGL, that has spent over 50bn dollars in last year alone.
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$TXN Writeup Now FREE + Next Report Incoming
I’ve decided to pull the paywall off my Texas Instruments research piece for anyone interested in learning a bit more about a compounder with good competitive advantages, secular tailwinds and good capital allocation leaders.

Signup for more as I my next writeup will be published tomorrow morning on a microcap serial acquirer with a founder led organization with strong high quality recurring revenue that is recession resilient. It will be all about $KPG.AX Kelly Partners Group Holdings.

Can’t wait to read this, this afternoon. I actually decided to check this stock out after reading (in 2022) Philip Fisher’s book from 1957! They’re holding a long-term spot in the dividend growth wing of my portfolio.
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Forecast: Semiconductors with +13.9% growth in 2022, but +4.6% slowdown in 2023 📈
World Semiconductor Trade Statistics forecasts +13.9% growth for the worldwide semiconductor market in 2022, with growth slowing significantly to +4.6% in 2023. The slowdown comes on top of a very strong 2021 which saw +26.2% growth. It’s only natural that demand comes down after such a huge move for the whole industry. WSTS exists since 1986, so I’m inclined to trust their data and forecasts.

While the breakdown of semiconductor categories in 2021 looks great across the board, 2022 paints a different picture. Some categories like Optoelectronics and Integrated Circuits - Micro are clearly not growing that fast anymore. But the main culprit is the memory category which is expected to slow down to only +0.6% growth in 2023.

Among semiconductors, the memory category has always been highly cyclical. Memory chips are basically a commodity with intense competition, thus no producer can build a sustainable edge. This category will always struggle the most in economic downturns.

To get a good visual representation of cyclicality, take a look at the monthly chart of $MU and spot the wave patterns. I would never invest in such a company for the long term. On the other hand, if you are a value investor with semiconductor knowledge, this is probably a lot of fun for you.

As for the other categories, it seems like growth will continue a while longer. I wouldn’t go all-in the semiconductor category anymore, but rather pick the best companies from those that are still growing and have proven long-term track records. In the analog category, $TXN comes to mind, an extremely well-run company.

Also, take a look at top semiconductor equipment manufacturers like $KLAC, $LRCX and $AMAT
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What I did this week
What I did this past week was enjoy a long overdue holiday with the family. A week in the mountains, great weather, snow falling. Watched the little 'uns learn to ski, and renewed my own enjoyment of the sport once again. The muscles and bones are feeling every day of my 54 years now though :)

Income Portfolio: Opened a new position in $HRL . Increased holdings in $DVY and $OZK . Collected dividends on $KMI $OKE $TXN $AOS and $HTGC .

Growth Portfolio: Opened new positions in $CELH and $SSO . Cut losses on $HALO and $BMBL. I still like both of these and will revisit another time.

Speculative: Sold all $MANA.X for a small gain.
Giuliano's avatar
$2.1m follower assets
Overview of Semiconductor's recent performance
The semiconductor industry has gained attention in the past years due to secular trends like AI, robotics, 5g, EV.

Highest top line growth:

$INDI is benefiting rom the growth trend in advanced-driver assistance systems and EVs.

$MWPR presented solid growth while guiding for 51% growth.

Highest guided top line growth:

$AEHR has developed a technology with tangible benefits to test emerging semiconductor components.

Analysts expect continued growth from Aehr and, it turned profitable on a NI basis last year.

Highest Forward PS:

Companies with very solid fundamentals and bright future prospects deserve a premium.

Worth noticing top 4 is heavily profitable.

Highest Free cash flow margin and Forward PS:

Companies with a high cash flow margin also have a premium valuation. This is an important metric in the current environment.

$ASML leading the group.

Net Profit Margin and Forward PS:

A company with a higher net profit margin generally deserves a premium valuation on a PS standard since a top line dollar gets cleaner to shareholders pocket.

$TXN Leading the group.

In conclusion:

The semiconductor industry is a high growth yet profitable sector, with very bright future prospects.

Source:

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