Tariffs And Semiconductor Cycles Will Pressure Margins As Demand Recovers

Key Takeaways

• Geopolitical tensions and tariffs may disrupt revenue through supply chain uncertainties, particularly in key markets like China.
  
• High capital expenditures and complex supply chain reliance could limit free cash flow growth, impacting margins and future earnings.
  
• Strong revenue growth, sound capital management, and strategic manufacturing investments position Texas Instruments for sustainable profitability amid recovering industrial and automotive demand.

Catalysts

Designs, manufactures, and sells semiconductors to electronics designers and manufacturers in the United States, China, rest of Asia, Europe, Middle East, Africa, Japan, and internationally.

• Texas Instruments expresses concerns regarding possible disruptions from tariffs and geopolitical tensions, which may affect their revenue by causing supply chain uncertainties and unpredictable economic conditions in key markets like China.
  
• The semiconductor industry appears to be at the bottom of its cycle, suggesting that future revenue growth could be limited as it recovers from low levels, and inventory buildup could result in a slower earnings trajectory if demand does not pick up significantly.
  
• Although there is a sequential recovery indicated in the industrial and automotive sectors, continued geopolitical issues and tariff implementations could pressure net margins through increased costs and affect revenue unpredictably.
  
• The company’s capital expenditures have been high, which could limit future free cash flow growth and their ability to manage rising costs and geopolitical challenges, impacting their earnings performance in the longer term.
  
• Despite efforts to maintain a geopolitically dependable capacity, reliance on complex manufacturing and supply chain adjustments may lead to cost inefficiencies, affecting net margins and resulting in less favorable earnings outcomes if global uncertainties intensify.

Texas Instruments Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more pessimistic perspective on Texas Instruments compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming Texas Instruments's revenue will grow by 3.5% annually over the next 3 years.
• The bearish analysts assume that profit margins will increase from 30.2% today to 31.6% in 3 years time.
• The bearish analysts expect earnings to reach $5.6 billion (and earnings per share of $6.13) by about April 2028, up from $4.8 billion today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 30.8x on those 2028 earnings, up from 30.0x today. This future PE is greater than the current PE for the US Semiconductor industry at 22.9x.
• Analysts expect the number of shares outstanding to decline by 0.22% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 9.13%, as per the Simply Wall St company report.

Texas Instruments Future Earnings Per Share Growth

Risks

• Revenue increased by 11% year-over-year and sequentially by 2%, indicating a strong performance and providing a foundation for stable growth, thus potentially improving overall earnings.
  
• Inventory levels are low across all end markets, and the semiconductor cycle is at a low point, suggesting that recovery and demand growth could lead to increased sales and enhanced free cash flow.
  
• Capital management and manufacturing investments position Texas Instruments for long-term success, suggesting potential improvements in revenue sustainability and profit margins.
  
• Recovery signs in industrial markets and continued growth in automotive sectors suggest ongoing demand that could lead to increased revenue and stable earnings per share.
  
• The company's robust capital return strategy, including significant share repurchases and dividends, indicates confidence in future cash flows and suggests sustained profitability, which might positively impact net margins.

Valuation

• The assumed bearish price target for Texas Instruments is $148.11, which represents one standard deviation below the consensus price target of $178.72. This valuation is based on what can be assumed as the expectations of Texas Instruments's future earnings growth, profit margins and other risk factors from analysts on the more bearish end of the spectrum.
  
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $248.0, and the most bearish reporting a price target of just $125.0.
  
• In order for you to agree with the bearish analysts, you'd need to believe that by 2028, revenues will be $17.8 billion, earnings will come to $5.6 billion, and it would be trading on a PE ratio of 30.8x, assuming you use a discount rate of 9.1%.
  
• Given the current share price of $160.05, the bearish analyst price target of $148.11 is 8.1% lower. The relatively low difference between the current share price and the analyst bearish price target indicates that they believe on average, the company is fairly priced.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.