An Update On "The Most Shareholder-Friendly Company On The Planet"

Most semiconductor stocks have rallied nicely in recent months on the expectation that global demand would pick up in the fourth quarter. But Texas Instruments (NYSE: TXN) recently threw some cold water on that outlook.

The company reported third-quarter revenues of $3.8 billion and earnings of $1.49 per share, which were roughly in-line with estimates. But its fourth-quarter forecast was bleak. The company is expecting revenues of $3.2 billion, a sequential decline of $600 million (16%) from this past quarter. Management flatly stated that the downturn could persist into the first half of next year.

Like many companies with a global presence, Texas Instruments cited the negative impact of the ongoing trade war with China. The White House ban on U.S. companies conducting business with telecom equipment maker Huawei has been particularly problematic. Texas Instruments is a key supplier, and Huawei typically accounts for about 3% to 4% of overall sales.

That's a big reason why revenue in the communications sector is expected to drop by 20% next quarter. But the weakness is broad, from automotive to electronics.

CFO Rafael Lizardi explained the situation using a colorful analogy. "We are at the very end of a long supply chain, and when the ones at the very front pull back, it becomes a traffic jam."

When end-market demand slows, buyers curtail orders for the chips that are embedded in those products and start whittling down their existing inventory. Texas Instruments is a few miles behind the "wreck" but going nowhere fast.

Restating The Case For TXN

TI calculator

As some of you may know, we added TI to the Daily Paycheck premium newsletter portfolio back in April. And despite these recent developments, my subscribers and I are still up 12% at last count.

For those who may have missed my previous commentary on Texas Instruments, I've been calling TI one of the most shareholder-friendly companies on the planet. So let's briefly restate the case for why it's still worth owning.

Texas Instruments is the largest analog chip producer in the world. Analog chips help convert real-world inputs (like temperature, speech, video and light) into the digital computer language of 1s and 0s. In that sense, they act as something of a translator inside electronic devices.

The biggest sources of demand are the automotive and industrial fields, but the firm's products can be found in everything from smartphones to medical devices to aerospace equipment.

TI is also one of the most efficient, low-cost chip producers around. One reason for this is because the company took advantage when rivals liquidated assets over the years by buying advanced 300-millimeter manufacturing equipment at dirt-cheap prices. And on a per-unit basis, production from 300MM facilities is roughly 40% less expensive than the output from 200MM equipment used by most other competitors.

That's one reason why Texas Instruments ranks in the 91st percentile in free cash flow (FCF) generation, outperforming more than nine out of every 10 U.S. companies. It routinely turns 40 cents of every dollar of sales into FCF.

Action To Take

Even the best businesses go through periods where demand cools. In this case, slumps typically last three or four quarters before customers start to restock the pantry.

That doesn't dampen the firm's long-term earnings potential. And despite soft industry conditions, FCF increased by 2% over the past twelve months to $6.0 billion -- fueling another hefty (17%) dividend hike.

Texas Instruments is positioned to keep gushing cash and producing superior returns for decades to come. The wide-moat business is a global leader in an attractive, fragmented, and fast-growing market.

And as I've mentioned before, we're still in the very early innings of the internet of things (IoT) revolution. Billions of household and industrial devices will be connected to the internet and rely on analog sensors to process data.

For these reasons, TXN is still an attractive "buy" for patient investors.

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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