Expanding 300-Millimeter Manufacturing Capabilities Will Meet Future Customer Demand Efficiently

Key Takeaways

• Strategic CapEx investment and focus on industrial and automotive sectors position Texas Instruments for significant revenue growth and operational efficiency.
  
• Strong cash flow management, supported by CHIPS Act benefits, ensures shareholder-focused returns and resilience against competitive pressures, especially in China.
  
• Decline in key markets, competitive pressures, and inventory challenges could result in revenue, margin, and profitability issues for Texas Instruments.

Catalysts

Designs, manufactures, and sells semiconductors to electronics designers and manufacturers in the United States and internationally.

• Texas Instruments is in the middle of a 6-year elevated CapEx cycle, which will enhance their manufacturing capabilities, particularly with the 300-millimeter capacity. This strategic investment positions the company to meet future customer demand efficiently. (Impact: Revenue growth, Operating Efficiency)
  
• A significant focus on industrial and automotive sectors is expected to yield future revenue growth due to increased chip content per application in these markets, providing higher secular growth potential compared to other sectors. (Impact: Revenue Growth)
  
• The company completed 21 consecutive years of increasing dividends, which signals strong cash flow management and shareholder return focus, potentially enhancing shareholder value and attractiveness. (Impact: Earnings Per Share)
  
• The $1.6 billion CHIPS Act grants, coupled with tax incentives, will lower future depreciation expenses and improve cash flow projections, leading to higher free cash flow per share, crucial for long-term value creation. (Impact: Free Cash Flow Per Share)
  
• TI's ability to leverage its broad product portfolio and diverse geographic reach offers resilience and growth opportunities, particularly within China, where the company is performing well and gaining market presence amid a competitive landscape. (Impact: Revenue, Market Share)

Texas Instruments Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Texas Instruments's revenue will grow by 10.8% annually over the next 3 years.
• Analysts assume that profit margins will increase from 30.7% today to 31.3% in 3 years time.
• Analysts expect earnings to reach $6.7 billion (and earnings per share of $8.1) by about January 2028, up from $4.8 billion today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting $8.1 billion in earnings, and the most bearish expecting $5.5 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 32.1x on those 2028 earnings, down from 34.3x today. This future PE is greater than the current PE for the US Semiconductor industry at 31.2x.
• Analysts expect the number of shares outstanding to decline by 3.37% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 8.11%, as per the Simply Wall St company report.

Texas Instruments Future Earnings Per Share Growth

Risks

• Decline in major markets such as industrial and automotive, which make up 70% of TI's revenue, could signify potential challenges in maintaining or growing revenue.
  
• Embedded Processing segment's significant year-over-year decline of 18% and its impact on margins suggest potential pressures on earnings from this segment.
  
• Decreasing gross profit margins, driven by higher depreciation, reduced factory loadings, and lower revenue, may negatively affect overall profitability and net margins.
  
• Increasing competition, particularly in key regions like China, could impact market share and consequently TI's revenue performance in such critical markets.
  
• Elevated inventory levels and increasing inventory days pose potential risks for inventory obsolescence, which could eventually pressure margins and affect earnings.

Valuation

• The analysts have a consensus price target of $205.69 for Texas Instruments based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $284.0, and the most bearish reporting a price target of just $130.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $21.3 billion, earnings will come to $6.7 billion, and it would be trading on a PE ratio of 32.1x, assuming you use a discount rate of 8.1%.
  
• Given the current share price of $180.57, the analyst's price target of $205.69 is 12.2% higher.
  
• 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.