In this current market, we continue to see strong companies that are producing strong earnings in extremely challenging times sell-off. I am looking to capitalize on these sell-offs. Texas Instruments (TXN) reported earnings on Tuesday evening, and the stock has sold off about 3% since. Earnings beat on both revenue and EPS and the future remains bright, but yet the stock gaps down. Texas Instruments also offers a great dividend to collect while you wait for the stock to rebound. I could see the stock sliding a little further to some key technical levels, but I am bullish long term on the stock.
How Were The Earnings?
On Tuesday night, Texas Instruments reported Q3. Some of the highlights included:
(All data from is from the earnings call)
- GAAP EPS of $1.45. This was a beat of $0.17.
- Revenue hit $3.82 billion. This was a beat of $370 million, and 1.3% YoY growth.
- Gross margin came in low at 64.3% vs. consensus of 64.6%.
The company saw revenue grew 18% from Q2 driven by a nice rebound in the automotive sector. This helped drive not only a beat but year-over-year growth with is always encouraging to see in times like these. Looking at the segments within the company, the hardest hit segment at -19% was the “other” segment. This can be tied to a lack of back-to-school sales when it comes to calculators, which is due to COVID-19. Analog and Embedded Processing grew 18% and 19% respectively in the quarter.
Why didn’t the stock move on this news? Well, it would appear some of the information was priced in. I do think the lower than expected margin is what did it though. Especially as the company talked about growing capacity, which one would think would increase margin. We did see operating margins increase to 42.2% vs. consensus of 40%, so this may just be a short term bump in the road. We will have to wait to see what future margin reports look like to get a better idea of this.
All in all, you have to be pretty happy with these numbers given the scenario. The stock is up over 55% off the March lows, a little consolidation would be healthy at this point. I am looking to buy the stock as it falls back to test some key technical levels.
What’s Going To Drive The Stock Higher?
As I lead onto above, it’s going to be growing the margin. If the stock can post numbers as it did in times like these, and not get a boost, it must be the one thing holding it back. Looking forward to Q4, the company is expecting to land somewhere in the range of $3.41 billion to $3.69 billion. This would be a decline on Q3 numbers, but it would be growth year-over-year. This is going to set up to be an overall decline on an annual basis by about 2% depending on where Q4 revenue falls. This is pretty good given what the world has been through. Looking below we can see Q4 highlighted as well as the rebound expected in 2021.
The company has stated and shown that it will continue to invest in itself in terms of R&D. $1.5 billion has been thrown to that cause. That has to pay dividends at some point. If you can’t invest in yourself, who can you invest in? Free cash flow on a trailing 12-month basis was $5.2 billion, which is healthy. One of the concerns when it comes to the balance sheet is the debt to equity ratio is getting high as it currently sits at 77%, which is up from 41% over the last five years. I’m going to blame part of this on COVID-19 and monitor it over the next few years. I would like to see this start to drop and quickly as revenue climbs back up to where it was before 2020 started. The good news is the debt is well covered by the cash flow and the interest payments are well covered by EBIT.
Looking below we can see expected EPS growth over the next few years. Some analysts seem to believe the company will take off. As for Q4, Texas Instruments is expecting EPS to finish off the year in the range of $1.20 and $1.40. I am going to pump the breaks a bit on the below chart. As I do think the company will continue to grow, I think the 1 analyst putting $8.81 for an EPS in 2024 is a little optimistic. The good news is there is a great dividend to collect while we wait and see if the analyst is indeed correct.
How’s The Dividend?
One of the main reasons to own Texas Instruments is a great dividend. Now some will argue what makes up a “great dividend” for me, I look at three things. The first being the general size of the dividend. This is my “Is it worth it?” question. Texas Instruments offers a $3.60 annual dividend, which yields at about 2.8%. This is by no means a top dividend payer, but it is above the bottom 25% of the market. The second thing I look at is the payout ratio. This is my “Is it sustainable?” question. A quick look will tell you that the company currently has a payout ratio of ~65%. This means that it is well covered by earnings and there is no reason to go into debt to pay out shareholders. Three years down the road, it is estimated the payout ratio is 68%, which points to sustainability.
The third and arguably most important question is “Will it grow?”. This is my longevity question. One glance at the chart above will show you that the dividend not only has a solid growth history, but it will continue to do so. This year marks 17 straight years of increases. Quick math will tell you that the rate of the increase has slowed, but that would be expected given what the dividend currently sits at. I would estimate that the company will target 15+% growth year over year going forward. Assuming of course the underlying numbers for the company as a whole continue to improve as well. This is a great stock to tuck away in an income portfolio as it will be sure to generate income over time. Timed with a good buy and you will see decent capital gains as well.
What Does The Price Say?
Firstly looking at the valuation, we can see that the market has somewhat nailed this as we currently stand. Fair value is sitting at about $133.24, while the stock is trading within 10%. Given what we have seen across multiple industries for much of this year, that is pretty good. This is including the ~6% the stock has fallen thus far off the highs. I do not think this is a stock where you are going to see a quick 20%, but strong stable growth. The stock is currently up about 14% since January.
As for the technical side, let me show you why I think there may be a buying opportunity in the works here, starting with the general trend line. The easiest technical piece there is to use is trend lines. For that reason, I will start here. Looking below, we can see that ever since the COVID crash, the stock has climbed steadily back. The stock is currently up 55% off the lows and has held the trend shown below very well. It would appear as if we are about to test it again. A bounce off this trend would be very bullish. On the counter, a break could be bearish in the short term.
Secondly, I look to the 50-day moving average for support. Looking below we can see this moving average has been a tell-tale sign of what’s to come over the last 18 months. When it breaks, and it’s a gap down, look out below as circled. On the counter, it has also proven to be solid support for the stock over the last few months. Looking back we can see it has traced the stock very well with very little divergence. As long as this maintains a positive slope, it means shareholders are likely making money. If the stock bounces off of it here, it would mean another 3-5% to the downside before reversing in the short term. We could see something similar to what we saw in September when it comes to consolidation around the moving average here as the stock makes up its mind.
In my opinion, the most important technical aspect of any chart is the horizontal support and resistance levels. Starting with the level that matches what is shown above, we can see that ~$142 has some near term support thanks to previous resistance. This is where I think the stock will fall too in the next few days and depending on how it happens, a spot to pick a few shares up.
This leaves the most crucial level of ~$135. “But Graham, this is well below what you mentioned above”… Yes, it is. But this is the most important level. Little blips in the trend or the moving average are quite common. Holding key levels is do or die, in my experience. Looking below, we can see that ~$135 has been both support and resistance over the last year. As we sit right now, we are only about 7% away from there. We may never get there, but if I was holding the stock, I would have my stop set here. The longer-term the support/resistance goes back, the better. As someone looking to get in, I would look to buy on a positive test.
As you can see, Texas Instruments (TXN) produced solid earnings, has a solid future, a great dividend, and fairly good support at some crucial levels that are nearing. This is a recipe for success. If you currently own the stock, I would not worry unless the stock breaches the $135 level mentioned above. I will be looking to buy if we get a further dip and test a couple of the key levels talked about. The future is bright for Texas Instruments fundamentally as a buying opportunity is presenting itself here. Stay safe out there!
Disclosure: I/we have no positions in any stocks mentioned, but may initiate a long position in TXN over the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.