Texas Instruments (TXN) is the holy grail of calculators for math majors and finance professionals everywhere. Over the last 15 years, I’ve had a TI-30X, TI-83, TI-89 Plus and Platinum, and TI BA II Plus financial calculator. Before 2012, I did not know much more about the company than the fact that they were the source of every calculator I’d ever owned. But quickly I learned TI has an entire portfolio of products in both the analog and embedded processing sectors.
So what are semiconductors and why are they useful? Semiconductors are the components that make microchips that are at the center of every electronic device. Everything from your cellphone, television, calculator, and even your computers/tablets has a use for a semiconductor of some sort. Now as you would expect, the thousands of companies that produce cellphones, televisions, or any other type of electronic device would look to have a semiconductor maker in its supply chain. This is the market that Texas Instrument seems to have quietly solidified its position.
The semiconductor sector is quite competitive. With competition like Intel, Qualcomm and several other smaller companies, Texas Instruments has steep competition. To differentiate itself, Texas Instruments made it a point to work with small businesses and universities. This action is somewhat out of the ordinary for companies in this particular sector in which big name customers equal big paydays. But this initiative underscores Texas Instruments’ dedication to foster long term relationships with startups invested in developing technology of the future. Because they are looking for the small time companies, TI has tremendous growth opportunity just as the small company does. Investing products early on in a company’s product life cycle encourages loyalty and better profitability long term for both parties.
Texas Instruments’ Cash Really Flows
As an investment, one of the most compelling arguments for Texas Instruments is the development of its cash flows. Over the last five years, the strong cash generated through operations has grown while capital expenditures decreases. Normally when capital expenditures drops it is sometimes an indicator that pursuit of new projects or new equipment is decreasing. But that’s not what seemed to happen to Texas Instruments. According to the annual report in 2011, capital expenditures were primarily due to assembly/test equipment and analog wafer manufacturing equipment. From 2012 to 2015, the semiconductor manufacturing equipment was mentioned as the primary source for capital expenditures. So they have consistently been investing in new equipment, but they’ve managed to keep the cost down. This, in turn, provides more free cash flow for investors to partake in.
Return on Investment
I had no idea that 2013 would be the pivot point in which my investment in Texas Instruments would be more profitable than a position in Intel or Qualcomm. Considering they are all in the semiconductor sector, I expected similar performance across the board. When first researching the semiconductor industry, Intel and Qualcomm were out of my price range. Texas Instrument won my investment by default. But I didn’t expect such a big jump in returns in only a matter of 5 years. Take a look at how an investment of $2,500 in December of 2011 would progress to December 2015. Assuming the investor did not reinvest dividends the return on investment percentage was calculated by dividing the annual profit or loss on the investment by the initial investment.
Return on Equity
Another metric that is valuable when assessing a company is the return on equity. Return on equity is a reflection of how well the company can generate profit on the shareholder’s dollar. The chart below is comparing the ROE of Texas Instrument, Qualcomm, and Intel. I think it’s clear that Texas Instrument wins this race as well. I was surprised to see this particular metric as Intel has been critically acclaimed in portfolios like my dad’s. Most of his contentment with Intel is the returns he has generated over the past 15-20 years. I’ve only been investing about a quarter of that time, hence why I prefer TXN.
Texas Instruments doesn’t have much else to prove. They are fully capable of cutting costs and spending, while seemingly still hard at work in developing progressive technology. I think the company’s focus on small businesses and universities will be an advantage through the upcoming years. Texas Instruments seems to rely on small innovating companies and entrepreneurs to propel it forward since they have made cuts into their R&D budget through the past few years. Texas Instruments started to walk the trail less traveled back in 2012 with cost cutting. But they seem to be continuing down that path with no foreseeable sign of turning around.
This author is long 12.079 shares TXN and long 6.06 shares QCOM as of writing this post.