Expanding in Industrial and Automotive Markets with Calculated Investments Poised to Propel Revenue Growth and Enhance Investor Appeal

What are the underlying business or industry changes driving this perspective?

• Strategic emphasis on industrial and automotive markets, with customers increasingly turning to Analog and Embedded technologies for more reliable, affordable, and lower-emission end products, driving growing chip content per application and likely to fuel revenue growth.
• Commitment to disciplined capital allocation towards manufacturing and technology, broad product portfolio, and diversification strategy to bolster long-term free cash flow per share, potentially enhancing net margins and earnings.
• Continuation of dividend increases for the 20th consecutive year, signaling confidence in future cash flow generation and potentially underpining EPS growth.
• Significant investment in 300-millimeter manufacturing assets and inventory, aimed at supporting long-term objectives and maximizing free cash flow per share, likely to positively impact revenue and profitability.
• Anticipation of a lower effective tax rate of about 13% for 2024, which could improve net income and EPS, making the stock more attractive to investors.

How have these above catalysts been quantified?

• Analysts are assuming Texas Instruments' revenue will grow by 4.8% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 37.0% today to 34.7% in 3 years time.
• Analysts expect earnings to reach $7.0 billion (and earnings per share of $7.56) by about March 2027, up from $6.5 billion today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 26.4x on those 2027 earnings, up from 24.0x today.
• To value all of this in today’s dollars, we will use a discount rate of 8.67%, as per the Simply Wall St company report.

What could happen that would invalidate this narrative?

• Depreciation costs associated with planned capacity expansions could lead to higher manufacturing expenses, negatively affecting gross profit margins.
• Underutilization of manufacturing facilities due to adjustments in factory loadings and inventory levels could further decrease gross margins and operating profits.
• A continued increase in inventory levels, now at $4 billion, risks obsolescence and may pressure the company's cash flow if demand does not pick up as expected.
• Reliance on automotive and industrial markets, making up 74% of revenue, exposes the company to sector-specific downturns which could significantly impact revenues and earnings.
• The global semiconductor market's cyclicality and current weakness across key end markets suggest revenue and net income may remain under pressure if these conditions persist.

• The analysts have a consensus price target of $169.1 for Texas Instruments based on their expectations of its future earnings growth, profit margins and other risk factors.
  
• In order for you to agree with this, you'd need to believe that by 2027, revenues will be $20.2 billion, earnings will come to $7.0 billion, and it would be trading on a PE ratio of 26.4x, assuming you use a discount rate of 8.7%.
  
• Given the current share price of $171.14, the analyst's price target of $169.1 is 1.2% lower. The relatively low difference between the current share price and the analyst target indicates that they believe 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.