Texas Instruments has had an impressive run over the past six months as its shares have beaten the S&P 500 by 14.1%. The stock now trades at $282.11, marking a 26% gain. This was partly thanks to its solid quarterly results, and the performance may have investors wondering how to approach the situation.
Is now the time to buy Texas Instruments, or should you be careful about including it in your portfolio? Get the full breakdown from our expert analysts, it’s free.
Why Is Texas Instruments Not Exciting?
We’re glad investors have benefited from the price increase, but we’re passing on Texas Instruments for now. Here are three reasons you should be careful with TXN, plus one stock we’d rather own.
1. Long-Term Revenue Growth Disappoints
A company’s long-term sales performance can indicate its overall quality. Even a bad business can shine for one or two quarters, but a top-tier one grows for years. Regrettably, Texas Instruments’s sales grew at a mediocre 3% compounded annual growth rate over the last five years. This was below our standard for the semiconductor sector. Semiconductors are a cyclical industry, and long-term investors should be prepared for periods of high growth followed by periods of revenue contractions.
2. Shrinking Operating Margin
Operating margin is one of the best measures of profitability because it tells us how much money a company takes home after procuring and manufacturing its products, marketing and selling those products, and most importantly, keeping them relevant through research and development.
Looking at the trend in its profitability, Texas Instruments’s operating margin decreased by 14.2 percentage points over the last five years. This raises questions about the company’s expense base because its revenue growth should have given it leverage on its fixed costs, resulting in better economies of scale and profitability. Its operating margin for the trailing 12 months was 37.3%.
3. EPS Trending Down
We track the long-term change in earnings per share (EPS) because it highlights whether a company’s growth is profitable.
Sadly for Texas Instruments, its EPS declined by 1.7% annually over the last five years while its revenue grew by 3%. This tells us the company became less profitable on a per-share basis as it expanded.
Final Judgment
Texas Instruments’s business quality ultimately falls short of our standards. With its shares topping the market in recent months, the stock trades at 27.8× forward P/E (or $282.11 per share). This valuation multiple is fair, but we don’t have much faith in the company. We’re fairly confident there are better stocks to buy right now. We’d suggest looking at the most entrenched endpoint security platform on the market.
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