Texas Instruments (TXN) Down 2.3% Since Last Earnings Report: Can It Rebound?

It has been about a month since the last earnings report for Texas Instruments (TXN). Shares have lost about 2.3% in that time frame, outperforming the S&P 500.

Will the recent negative trend continue leading up to its next earnings release, or is Texas Instruments due for a breakout? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at its most recent earnings report in order to get a better handle on the important catalysts.

Texas Instruments Beats on Q2 Earnings & Revenues

Texas Instruments reported second-quarter 2019 earnings of $1.36 per share, which surpassed management’s guided range of $1.12-$1.32.

Excluding discreet tax benefit of 7 cents from the reported figure, earnings of $1.29 per share comfortably beat the Zacks Consensus Estimate of $1.21.

However, the reported figure decreased 2.8% year over year but improved 7.9% sequentially.

The company delivered revenues of $3.668 billion, outpacing the Zacks Consensus Estimate of $3.605 billion. It was also up 2.1% from the previous quarter. Further, the figure came within the company’s guided range of $3.46-$3.74 billion. However, it declined 8.7% from the year-ago quarter.

Sluggishness in the company's Analog and Embedded Processing segments owing to weak demand affected the top line.

Nevertheless, the company’s focus on innovation of product portfolio across both the segments is evident from growing research and development (R&D) spending. This continues to be a key catalyst.

Moreover, the company remains confident on portfolio strength, efficient manufacturing strategies and optimized capital allocation in growth areas. Additionally, Texas Instruments continues to increase investments in the automotive and industrial markets which are anticipated to yield good returns.

End-Market in Detail

Texas Instrument’s revenues were down by upper-single digit in the industrial and automotive market. This can be attributed to softness in demand environment.

It also affected the company’s presence in personal electronics market where revenues were down by low-double digits.

Further, the company witnessed sluggishness in the communications equipment and enterprise systems market during the reported quarter.

Segments in Detail

Analog: The company generated $2.534 billion from this segment (69.1% of total revenues), which decreased 5.8% from the year-ago quarter. This can be attributed to weak performance of high-volume, signal chain and power product lines.

Embedded Processing: This segment generated $790 million revenues (21.5% of total revenues), down 16% year over year. This was primarily owing to weak performance of processors and connected microcontrollers.

Other: Revenues in this segment were $344 million (9.4% of total revenues). The figure was down 10% from the year-ago quarter.

Operating Details

Texas Instruments’ gross margin of 64.3% was down 90 bps from the year-ago quarter.

Selling, general and administrative (SG&A) and R&D expenses were $420 million and $390 million, respectively, in the reported quarter. We note that SG&A figure went down 4.8% but R&D expenses were up 1.6% on a year-over-year basis.

Operating margin was 41.1%, contracting 150 bps from the prior year quarter.

Balance Sheet and Cash Flow

As of Jun 30, 2019, cash and short-term investments balance came in $4.2 billion which was down from $4.1 billion as of Mar 31, 2019.

At the end of the reported quarter, the company had long-term debt of $4.6 billion, down from $5.1 billion in the prior quarter.

The company generated $1.8 billion of cash from operations, up from $1.1 billion in the previous quarter.

Capex was $284 million in the second quarter. Further, free cash flow stood at $1.51 billion.

Additionally, Texas Instruments paid out dividends worth $722 million during the reported quarter. Further, it repurchased shares worth $863 million.

Guidance

For third-quarter 2019, the company expects revenues between $3.65 billion and $3.95 billion.

Earnings are expected in the range of $1.31-$1.53 per share. The guidance includes an estimated $10 million discrete tax benefit.

How Have Estimates Been Moving Since Then?

In the past month, investors have witnessed an upward trend in estimates revision.

VGM Scores

Currently, Texas Instruments has a great Growth Score of A, though it is lagging a bit on the Momentum Score front with a B. Charting a somewhat similar path, the stock was allocated a grade of C on the value side, putting it in the middle 20% for this investment strategy.

Overall, the stock has an aggregate VGM Score of B. If you aren't focused on one strategy, this score is the one you should be interested in.

Outlook

Estimates have been broadly trending upward for the stock, and the magnitude of these revisions looks promising. Notably, Texas Instruments has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.

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