Texas Instrument (TXN) Drops After Topping Sales and Earnings But Misses on Sales Guidance to Prompt a Downgrade

July 22, 2021 7:37 AM EDT
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Price: $185.13 -1.66%

Rating Summary:
    22 Buy, 17 Hold, 6 Sell

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Today's Overall Ratings:
    Up: 13 | Down: 27 | New: 42
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Shares of Texas Instruments (NASDAQ: TXN) are down nearly 5% in pre-open Thursday after the company presented its second-quarter results after the market close yesterday.

TXN made a profit of $2.05 per share on revenue of $4.58 billion to easily top the analysts’ expectations of $1.83 a share on sales of $4.36 billion. On an adjusted basis, the company said it earned $1.99 per share, still topping Street’s estimates.

“Revenue increased 7% sequentially and increased 41% from the same quarter a year ago due to strong demand in industrial, automotive and personal electronics. "In our core businesses, Analog revenue grew 6% and Embedded Processing grew 2% sequentially. From a year ago, Analog revenue grew 42% and Embedded Processing grew 43%,” Rich Templeton, TI's chairman, president and CEO, commented.

Despite a Q2 beat, Texas Instruments delivered Q3 guidance that disappointed investors. The company expects to make a profit of $2 per share on revenue of $4.58 billion, based on the guidance’s midpoint. This compares to earnings of $1.97 per share on revenue of $4.6 billion, according to the number compiled by FactSet.

Kinngai Chan, a senior analyst Summit Insights Group, has downgraded the stock to “Hold” from “Buy” citing channel inventory and demand normalization in the personal electronics and industrial markets.

“We believe TXN's 3Q21 outlook reflects some demand uncertainty in the PC and the smartphone markets. Additionally, our industry checks lead us to believe many of TXN's industrial customers have been buying ahead of demand in anticipation of supply constraints. While we continue to believe that TXN is gaining market share in the general analog and in the power management market, we think there could be some channel inventory digestion in 4Q21 as CV-19 pandemic demand tailwinds normalize,” Chan said in a note.

Contrary to Chain, BofA analyst Vivek Arya raised the price target on the Buy-rated TXN to $225.00 per share from $210.00 per share as he described the Q2 earnings report as “solid.”

However, Arya says that a guidance sales miss, as well as a very low buyback activity, are likely to concern investors going forward.

“TXN’s sales beat versus guidance has averaged ~9% in the past year versus 3% historically. While the low buyback is inexplicable (though provides optionality for M&A), we believe the Q3 outlook could prove conservative given the strong demand environment, constrained supply (TXN inventory at 111 days, well below target of 130-190 days), and TXN’s planned capacity additions (Micron fab acquisition). Overall, we raise CY21/22E pf-EPS by 6%/2% to $7.91/$8.33, and our PO to $225 on 28x CY22E EV/FCF, increased from 26x on its strengthening cash generating profile and competitive positioning. This multiple is in line with diversified peers which trade at 16-40x FCF, and justified by TXN’s broad industry exposure and proven history of FCF generation/returns which are 3x that of SPX industrial companies (~40% vs 13%),” Arya commented in a note.

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