What is Texas Instruments famous for?
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Texas Instruments (TI) is a technology company based in Dallas, Texas, that designs and manufactures semiconductors and other electronics. The company was founded in 1930 as Geophysical Service Inc. (GSI), a provider of seismic exploration services for the oil and gas industry.
In the late 1940s, GSI began developing electronic devices for military and industrial applications, including radar systems and missile guidance systems. In 1951, the company changed its name to Texas Instruments Incorporated (TI) to reflect its expanding focus on electronics.
TI went on to develop a number of groundbreaking technologies, including the first transistor radio in 1954, the first integrated circuit in 1958, and the first handheld calculator in 1967. These innovations helped establish TI as a leader in the electronics industry and contributed to the growth of the broader technology sector.
Throughout the 1970s and 1980s, TI continued to expand its business through acquisitions and diversification into new markets, such as consumer electronics and computer peripherals. However, the company faced increasing competition from lower-cost competitors in the 1990s and struggled to maintain its profitability.
In response, TI refocused on its core strengths in analog and digital signal processing, and invested heavily in research and development to create new products and technologies. The company also restructured its operations and divested non-core businesses to streamline its operations and improve profitability.
Today, TI remains a major player in the semiconductor industry, with a diverse portfolio of products serving a wide range of markets, including automotive, industrial, consumer electronics, and communications. The company has a global presence, with operations in more than 30 countries and approximately 28,000 employees worldwide.
Now let’s take a look at their financials!
Cash Flow Analysis and Forecasts
Historical Cash Flow Analysis
We can obtain the net cash flows from operating activities (CFO) and all the specific adjustments (from Net income to CFO) for the fiscal year 2021. However, it is still illogical and improper to replicate all these adjustments for the next five years. To better predict the cash flow in the next step of this analysis, we used earnings before interest and tax (EBIT, i.e., operating income) as a starting point in the analysis because EBIT accurately reflects the recurring profitability and sustainability of Texas Instruments (TI).
From the income statement of TI, the cost of goods sold (COGS) is straightforward, so we focused more on the detailed items in operating expenses. We did not make any adjustments to the selling, general, and administrative (SG&A) and research and development (R&D) reporting items because these are necessary expenses for business operations and going concern.
It is worth paying attention to acquisition charges and restructuring charges/others shown in the income statement.
By comparing the last five years’ income statements, we found that these two are recurring reporting items. It has also been proved by the management that acquisition, integration, and restructuring are the primary means for TI to achieve inorganic growth from the 2021 Annual Report (Texas Instruments, 2022a). Considering the assumptions of going concern and continuing revenue growth we made in the cash flow forecasts, we believe that acquisition and restructuring charges are the essential elements that contribute to TI’s future growth. That said, we regard these two reporting items as mandatory operating items and did not make any special adjustments for the EBIT of TI.
Another critical element when adjusting EBIT to net income is capital expenditure.
From TI’s 2021 Annual Report Chairman’s Letter. We found that TI will continue to build the next 300-millimeter wafer fabrication plants in 2022 (Texas Instruments, 2022b). Moreover, it was also disclosed that capital expenditures of TI are expected to be higher than historical levels (Texas Instruments, 2022a). In effect, we predicted capital expenditures as a percentage of continuously increasing revenue as shown in our assumptions in Appendix 8.
Cash Flow Forecasts
Based on the historical analysis, we made the cash flow forecasts (i.e., free cash flow to the firm (FCFF)) for the next five years (2022 to 2026). The formula we used to calculate FCFF is: FCFF = EBIT*(1-tax rate) + Depreciation – Net Capital Expenditures – Change in working capital. Please see details of the cash flow predictions in the DCF tab of the Texas_Instruments_Calculation spreadsheet.
Valuation for TI
Based on the cash flow forecasts we performed for TI and the comparable competitors in the current market, we also evaluated the implied equity value of TI by using the Discounted Cash Flow (DCF) Model and valuation metrics.
The logic for the decision when assessing Option Two. Is that if our calculated implied equity value per share of TI is higher than the current market price. There is a high probability that the value of TI’s stock is undervalued. Theoretically, we can obtain an abnormal return in the process of price return to the intrinsic value of TI’s share.
The following sections are excerpts from the Valuation and Analysis of Texas Instruments (July 2022). DCF Valuation
First, we calculated the firm value of TI by discounting FCFF at the weighted average cost of capital (WACC). Next, we obtained the equity value by deducting debt value from the firm value. Finally, we got the estimated value per share of TI. Performed scenario analysis, and compared it with TI’s current share price. The additional assumptions that we used during the valuation are shown in Appendix 9. For calculations, refer to the DCF tab of the
Texas_Instruments_Calculation spreadsheet.
The equity per share we calculated from the DCF Model is USD 101.66. Considering the impact of changes in the revenue growth rate and discount rate, we also performed a scenario analysis: with the shift of revenue growth rate from 7% (the average growth rate of TI’s revenues in the last five years) to 27% (the growth rate of TXN’s revenues in2021), and the shift of discount rate from 8.3% to 11.3%.
We believe that only in rare situations such as continuous extremely high revenue growth rate or low discount rate will the estimated equity value per share be higher than the quoted price of USD 149.89 (with a 5% discount on the closing price on June 10, 2022).
Valuation Metrics
We also evaluated the value of TI’s share by using valuation metrics. We picked Analog Devices, NXP Semiconductors, and Micron as our closest competitors mainly due to the company size, industry sector, and business nature. Nvidia can also be considered because of its prominence and excellent financial performance. However, it does not compete with TI directly like the previously mentioned firms.
We selected various financial ratios such as price per share/sales per share, Enterprise value (EV)/EBITDA, and P/E as the potential valuation ratio. Considering the rapid growth of the semiconductor industry in the next five years, we picked the price per share/sales per share as the valuation ratio which reflects the industrial growth and investor expectation. By multiplying the sales per share of TI and the average and median of comparables’ valuation ratios separately, we obtained the estimated value range for TI, which is between USD 94.30 and USD 129.16. Please see details in Valuation Metrics tab of the Texas_Instruments_Calculation spreadsheet.
References
Texas Instruments. (2022b, March). 2021 Annual Report Chairman’s Letter. https://investor.ti.com/static files/cdbe5f54-1057-46ca-980d-47114e980b58
Texas Instruments. (2022a). Texas Instruments 2021 Annual Report. https://investor.ti.com/static files/fa8d76a4-359d-40a7-8477-fca4073e5eea/
What is Texas Instruments famous for?
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About Texas Instruments | TI.com
What is Texas Instruments famous for?
