What's in Store for Texas Instruments' (TXN) Q4 Earnings?

Texas Instruments Inc. TXN is set to report fourth-quarter 2015 results on Jan 27. Last quarter, the company posted a 13.43% positive earnings surprise.

Let’s see how things are shaping up for this announcement.

Factors at Play

Texas Instruments reported strong third-quarter numbers, with both the top line and the bottom line exceeding the respective Zacks Consensus Estimate. The company did well because end market weakness was less than anticipated. Revenues were up 6.1% sequentially but down 2.1% year over year.

TI’s gross margin was up 4 basis points (bps) sequentially but down 14 bps year over year. Higher volumes and more efficient 300-mm manufacturing drove the gross margin.

Management has successfully steered the business into analog and embedded processing applications, which ensure a more stable business and stronger margins.

Moreover, Texas Instruments continues to prudently invest the R&D dollars in several high-margin, high-growth areas of the analog and embedded processing markets. This is gradually increasing the company’s exposure to the industrial and automotive markets as well as dollar content at customers, while reducing its presence in volatile consumer/computing markets. We expect the to-be-reported quarter results to gain from this.

However, slow PC demand and a weak wireless capex spending could impact results in the fourth quarter.

For the fourth quarter, management expects revenues between $3.07 billion and $3.33 billion (down 6.7% sequentially at the mid-point). Earnings are expected within 64 cents to 74 cents.

Earnings Whispers

Our proven model does not conclusively show that Texas Instruments will beat estimates this quarter. This is because a stock needs to have both a positive Earnings ESP and a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) for this to happen. That is not the case here as you will see below.

Zacks ESP: Both the Most Accurate estimate and the Zacks Consensus Estimate are pegged at 69 cents. Hence, the difference is 0.00%.

Zacks Rank: Texas Instruments’ Zacks Rank #2 increases the predictive power of ESP. However, we need to have a positive ESP to be confident about an earnings surprise.

We caution against stocks with a Zacks Rank #4 or 5 (Sell-rated stocks) going into the earnings announcement, especially when the company is seeing negative estimate revisions.

Stocks to Consider

You may consider the following stocks, with a positive Earnings ESP and a favorable Zacks Rank:

Navios Maritime Acquisition Corporation NNA, with an Earnings ESP of +7.14% and a Zacks Rank #1.

Gilead Sciences Inc. GILD, with an Earnings ESP of +5.86% and a Zacks Rank #1.

MicroStrategy Inc. MSTR, with an Earnings ESP of +3.46% and a Zacks Rank #1.

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