Texas Instruments (NASDAQ: TXN) shares are down 25% from their pandemic highs, which no investors wish to see. However, Texas Instruments is a buy-and-hold-forever stock, so the 25% discount is good news for investors. Buy-and-hold forever stocks are blue chip names that pay dividends, have reliable cash flow, and disciplined management with the foresight to play the long game.
Because Texas Instruments meets all those criteria, the odds are high that the share price will recover. There are indications the market is oversold, overextended, and priming for a rebound.
Texas Instruments Management Plays the Long Game
Texas Instruments management is entrenched in this company for the long term. A headline search will reveal a new CEO, but he’s been with the company since 1999 and has worked his way up the chain. Most recently, Mr. Ilan served as executive vice president and chief operating officer, so the transition was natural and well-telegraphed.
Looking down the roster, the exec with the shortest tenure still has more than a decade with the company, and most are in the range of 2.
The company’s strategy is to invest in responsible growth and free cash flow growth over the long term. The company has sustained annual FCF growth above 10% since 2004 and paid dividends and repurchased shares. The dividend distribution comes with a 25% lifetime CAGR, down to 13% over the past few years, and a near-50% reduction in share count. This activity is seen in the stock price, which has risen 10X in that time.
Texas Instruments Built a Wide Moat
Texas Instruments has a wide moat derived not from a single customer, channel, or product but from its diverse offerings and wide range of end markets. The company makes over 80,000 products and sells to more than 100,000 clients, each using multiple Texas Instrument products per finished good. The company has a broad reach and deep penetration and is well-entrenched in the supply chain.
Texas Instruments' supply chain is part of its moat. The company is an IDM-style semiconductor foundry sharing space with other manufacturers globally. Domestically, the company has 4 semiconductor wafer fabrication facilities and manufacturing plants, and expansion is underway. This creates lower cost and faster time-to-market for its end markets.
Soft Markets Create a Value Play in Texas Instruments
Texas Instruments Q2 results were mixed in that YOY declines in revenue and earnings were offset by better-than-expected results. The takeaway from the analysts’ chatter is worry about FCF growth and the impact of soft business. In their eyes, the long-term outlook is stable due to an expected rebound in demand, but the near term has challenges.
The outlook for Q3 is for results to be relatively flat sequentially, down YOY, with earnings and FCF sufficient to sustain the capital return outlook.
As it is, the company pays about 57% of its earnings and uses the remaining cash flow for CAPEX and repurchases. The yield is running near 3.4%, with shares approaching a multi-year low, the highest in years. The outlook for next year includes high-single-digit revenue growth and margin expansion, so another solid distribution increase is on the table.
The Sell-Side is Holding Texas Instruments
Analysts and institutions own Texas Instruments, and the analysts see the stock moving higher. TXN is ranked on Marketbeat’s Lowest Rated Stocks page due to a string of price target reductions and 2 downgrades, but the consensus is firm. This stock is a Hold with a target of about 20% above the recent price.
That sentiment is echoed by institutions that have bought on balance each quarter of 2023. Assuming this activity continues, the floor in the action should be near.
The Technical Outlook: Texas Instruments Approaches Critical Support
The price action in Texas Instruments is in decline and may fall to critical support at the 1-year low. This level may produce a bounce, and a catalyst is in sight. The company reports Q3 earnings near the end of October, and the bar is set low. Analysts have been lowering their targets, providing an opportunity for outperformance.
Texas Instruments tends to outpace the consensus but may produce a larger-than-average beat this time. In this scenario, the stock will confirm support at or near $149 and consolidate for the next move.
The indicators, both oversold, favor this scenario. If not, there is a risk the price could fall through critical support on its way to a lower valuation.
