Texas Instruments, Inc. Beat the Street Again

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On Tuesday night, Texas Instruments (NASDAQ: TXN) reported results for the third quarter of 2017. A tight focus on high-growth end markets powered a large revenue surprise and torrential cash profits. Here's a closer look at TI's report.

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TI's third-quarter results: The raw numbers

Metric

Q3 2017

Q3 2016

Year-Over-Year Change

Revenue

$4.12 billion

$3.68 billion

12%

Free cash flows

$1.54 billion

$1.33 billion

16%

Net income

$1.29 billion

$1.02 billion

26%

GAAP earnings per share (diluted)

$1.26

$0.98

29%

For the record, Wall Street analysts would have settled for earnings of $1.12 per share on sales in the neighborhood of $3.9 billion. TI crushed both of these consensus estimates.

What happened with TI this quarter?

  • Customer demand from the automotive and industrial markets provided fuel for TI's revenue growth.
  • Breaking the revenues down by product category, TI's analog division reported 16% year-over-year sales growth thanks to healthy orders in the power and signal chain portfolios. Embedded processor sales rose 17%, evenly spread across microcontrollers and core processors.
  • As always, TI returned plenty of cash directly to shareholders during this quarter. The company spent a net of $574 million on share buybacks in the third quarter along with $495 million of dividend checks. That's 70% of TI's free cash flows, up from 55% in the year-ago period.

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Management provided the following guidance targets for the fourth quarter of 2017:

  • Top-line revenues should stop near $3.72 billion, a 9% boost from $3.41 billion in the fourth quarter of 2016.
  • On the bottom line, GAAP earnings were guided to approximately $1.10 per share, down from $1.14 per share a year earlier.

What management had to say

The focus on automotive and industrial computing is quite intentional, and that's not expected to change for the foreseeable future.

"We continue to focus our strategy on the industrial and automotive markets where we've been allocating our capital and driving initiatives to strengthen our position," said Dave Pahl, head of TI's investor relations organization. "This is based on a belief that industrial and automotive will be the fastest-growing semiconductor markets due to their increasing semiconductor content and that they provide diversity and longevity of products, which translates to a high terminal value of the portfolio."

Looking ahead

TI's long-term strategy rests on cash flow growth, unlocked by chasing down high-growth market opportunities within the company's analog and embedded processor wheelhouse. At the moment, that means leaning into the exploding automotive computing market while building on many years of industrial processor leadership.

Meanwhile, TI shares trade at a discount to rivals in the semiconductor industry, and that cash-backed 2.6% dividend yield looks as tasty as ever. Don't forget about TI the next time you're looking for an investment idea in the semiconductor sector.

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Anders Bylund has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.