Texas Instruments' Big Gains May Not Be Over Yet

Year to date, shares of Texas Instruments (TXN) are up almost 27%, yet you never hear anything about the company. Texas Instruments is a quality semiconductor holding.

Two weeks ago, Texas Instruments reported third-quarter fiscal 2016 earnings of 94 cents per share, 8 cents better than the consensus estimate. Earnings per share were up 24%. Revenue rose 7.2% to $3.67 billion, vs. the $3.48 billion consensus.

Demand for automotive semiconductors (up 10%) and a firmer industrial market led the way. Revenue rose 10% in the embedded processing group, and analog revenue grew 6%.

Texas Instruments is a big parts supplier to Samsung (SSNLF) , but the recall of the Note 7 didn't seem to have an effect on the results.

The company ended the quarter with a 62% gross margin, up 380 basis points. Gross margin is being driven by the move away from 200 mm wafers towards 300 mm wafers. The larger wafers reduce the company's manufacturing costs by nearly 40%. Gross margins should continue to rise over the next two or three years as the company switches over all of its production to 300 mm. At the end of last year, Texas Instruments had $6 billion of open 300 mm capacity.

Cash flow from operations was $1.4 billion. Free cash flow for the trailing 12 months was $3.9 billion, up 8% from the year-ago period. Free cash flow margin was 29.5%, up from 27.5% a year ago. Texas Instruments has said that strong free cash flow is important to maximizing shareholder value.

Total operating profit was up 20%. Analog operating margins were 40.9%, and for embedded processing operating margins were 27.7%. Net income was $968 million.

The Board Of Directors announced a 32% or 12 cent increase in the quarterly dividend, which brings the annual divided to $2 a share. This is the 13th consecutive increase in the dividend. During the quarter, the company bought back $500 million in stock.

Management implied that the fourth quarter would be down 10% year over year, which was a little more than 7% average drop. The company told analysts to use the midpoint of guidance and suggested year-end fiscal 2016 would be up 3%, which some saw as slightly disappointing.

The company sees fourth-quarter revenue in the range between $3.17 billion and $3.43 billion. With a 30% tax rate, Texas Instruments is expected to earn between 76 cents and 86 cents.

For next year, analysts are looking for 3% to 4% revenue growth and earnings of about $3.41 per share.

Texas Instruments is a high-quality holding and a well-managed semiconductor company. Historically, the shares trade between 20 and 22 times forward estimates, so investors could probably expect single-digit (5% to 8%) share price appreciation and a nice dividend over the course of the next year.

This article is commentary by an independent contributor. At the time of publication, the author held no positions in the stocks mentioned.

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