- Chipmaker’s stock reached highest level in history last week
- Texas Instruments teaches chip investors to value cash
At 86 years old, Texas Instruments Inc. doesn’t grow very much. It’s had just three annual sales increases in the past 10 years and analysts are predicting a decline again this year-- yet investors have bid its stock up to a record.
The company’s shares reached $62.14 last week, the highest level in its history, giving it a market value of more than $62 billion and adding to gains of 13 percent this year. It’s done that without any flashy product announcements, positive earnings surprises or high-profile customer wins. Instead, it maintains a wide, stable product offering and keeps spending in check.
“It’s TI’s strong free cash flow and stable, bullet-proof business model that continue to attract investors,” said Dan Morgan, a fund manager at Synovus Securities Inc. which owns Texas Instruments stock. “Portfolio managers are looking at TI as a safe bet.”
In the past, chip companies have been anything but a predictable haven. The skyrocketing cost of developing new products and production and wild swings in demand have often wiped out profits. The secret to investing in them was to pick a leader at the beginning of a cycle, ride a growth spurt, then get out before the inevitable downturn.
Texas Instruments once led the electronics industry as the creator the integrated circuit, digital watches and even the classic Speak & Spell, but it’s now known by most people as a legacy maker of calculators. Yet under Chief Executive Officer Rich Templeton, the company has taught investors that semiconductor makers can be stable cash cows.
“When we talk about semiconductors we now talk about growth that has matured,” said Tore Svanberg, an analyst at Stifel Nicolaus. “TI has understood that and done a really good job of attracting value investors.”
The company gives all of its free cash flow cash to shareholders in the form of share repurchases and dividends and has increased that cash production even as sales have stagnated. That means Texas Instruments guarantees a 5 percent to 6 percent return to its investors, according to RBC Capital Markets analyst Amit Daryanani.
“As an investor, in a 2 percent-type investing world, this is attractive to me,” said Charlie Smith, chief investment officer at Fort Pitt Capital. “We’ve owned the stock for over 20 years, think we understand them pretty well, and would look to add shares at lower levels.”
Templeton said earlier this month that his company, the biggest maker of analog chips, has deliberately opted out of the roller-coaster ups and downs suffered by companies that make big bets on expensive digital chips in competitive markets. Instead, Texas Instruments has created the broadest product lineup and biggest customer list in the industry and kept spending at a fraction of revenue. That will allow it to grow in the future as more chips get used in industrial machinery and cars.
"And if that doesn’t sound like a tech company, I’m OK with that," Templeton said at the Sanford C. Bernstein & Co. conference earlier this month. "We’ve got a lot of innovation that takes place inside the company."
While Texas Instruments is 24th out of 30 companies on the Philadelphia Stock Exchange Semiconductor Index when graded by sales growth, it comes in third when ranked by how small a portion of sales spent on research and development. That’s a good thing, according to Templeton. It’s still gaining market share, showing how well placed his bets are.
Consider the extremes in the industry. Texas Instruments sells chips such as power converters, components that manage the flow of electricity inside, say, a phone or computer, that sell for $2.50 each. Intel Corp.’s Xeon server processors retail for as much as $7,000 a pop. Intel has only a handful of customers who need such a product and spends more than $19 billion on research, development, plants and equipment. Pretty much every electronics device on the planet needs at least one power converter, and Texas Instruments got by with a total investment in research, plants and equipment of $1.8 billion last year. Intel reported four times TI’s revenue in 2015 but spent 11 times more to get there.
While Texas Instruments has inoculated itself against the worst of steep downturns, it’s also missed out on some of the surges that digital products in high-volume markets like smartphones can deliver. Qualcomm replaced it as the leader in mobile-phone processors and surpassed it in sales.
While analog chips that go into industrial equipment, cars and everyday items connected to the web are “dull,” according to Northern Trust Securities analyst Neil Campling, even moderate growth by Texas Instruments would be attractive, given the returns it’s already providing.
“The fact is, we’re in a world that’s short of growth,” he said. Texas Instruments and a couple of its analog peers are "dull in terms of products but not dull in terms of returns.”
More thrilling chip companies spend a good portion of their earnings calls and investor events talking about technology, new products and where they see markets heading. Texas Instruments executives typically try to turn the conversation to capital allocation. The company is the only one in the industry to hold an annual conference call to update investors on that topic alone.
“They doing a good job of making sure the investors don’t focus on technology,” said Stifel’s Svanberg. “They just want to be left alone to focus on their free cash flow.”
And how it puts that cash -- defined as cash generated from operations minus the cost of capital expenditure -- to work is winning it fans. Unlike some larger competitors, it doesn’t hoard cash overseas, hoping for a future U.S. tax break. It repatriates its earnings to the U.S., paying a higher tax rate but freeing up its cash for buybacks and dividends and delivering on its promise to use almost all of it for that purpose.
Northern Trust’s Campling said analysts have yet to adjust the method they use to rank and rate TI and try to compare it with other chipmakers that still prioritize top-line growth and spending whatever it takes to achieve that. Only about a third of the analysts who cover Texas Instruments recommend buying it. Linear Technology Corp, another obscure chipmaker that Campling says offers even better returns, is only rated buy by 17 percent of the analysts covering it.
Some are coming around to looking at it in different terms, closer to the way that investors have already settled on.
“The cash return story has resonated,” said Stacy Rasgon, an analyst at Sanford C. Bernstein. “Everyone agrees it’s one of the highest-quality companies in the sector. It’s a question of what price do you put on it?”