It has been about a month since the last earnings report for Texas Instruments (TXN). Shares have added about 4.5% in that time frame, underperforming the S&P 500.
Will the recent positive trend continue leading up to its next earnings release, or is Texas Instruments due for a pullback? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at the most recent earnings report in order to get a better handle on the important catalysts.
Texas Instruments Beats on Q3 Earnings, Revenues Up Y/Y
Texas Instruments delivered third-quarter 2018 earnings of $1.58 per share, beating the Zacks Consensus Estimate of $1.53. The figure increased 25.4% year over year and 15.3% sequentially. Further, it came within management’s guided range of $1.41-$1.63.
The company reported revenues of $4.26 billion, up 4% from the year-ago quarter and 5.9% sequentially. The figure also came within the guided range of $4.11-$4.45 billion.
Strong performance of analog segment across all the end-markets, especially in the communication equipment market, drove top-line growth.
However, the revenues figure missed the Zacks Consensus Estimate of $4.3 billion in the reported quarter.
The top-line was affected by the decline in the demand for the company’s products throughout the reported quarter. Moreover, weak performance of embedded processing segment also impacted the results in the third quarter.
Quarter in Detail
The company continues to increase R&D investments which remain a key catalyst for the expansion of its product portfolio.
Texas Instruments’ growing investments in the automotive and industrial markets remained positive throughout the quarter. The company witnessed double-digit growth in the automotive market during the reported quarter.
Further, it witnessed low-single digit growth in the communication equipment market. However, the company did not perform well in the personal electronics market and consequently declined by mid-single digit in the third quarter.
Segments in Detail
Analog: The company generated $2.91 billion from this segment (68.2% of total revenues), which increased 8% from the year-ago quarter. The segment witnessed strong performance of power and signal chain product lines. Moreover, with the emergence of 5G technology, analog products gained traction in the communication equipment market during the third quarter. However, the segment was affected by weak performance of high-volume products.
Embedded Processing: This segment generated $894 million revenues (21% of total revenues), declining 4% year over year. This was primarily owing to weak performance of processors during the reported quarter. Further, sluggishness in the communications equipment market remained negative throughout the reported quarter without which the revenues within this segment would have reflected growth.
Other: Revenues in this segment were $460 million (10.8% of total revenues). The figure fell 5.5% from the year-ago quarter due to weak performing custom products.
Texas Instruments’ gross margin of 65.8% was up 60 basis points (bps) sequentially and 130 bps from the year-ago quarter.
Operating expenses of $786 million were down 0.1% from a year ago and 4.7% sequentially.
Operating margin was 45.5%, up 210 bps from the year-ago quarter and 290 bps from the previous quarter.
Balance Sheet and Cash Flow
As of Sep 30, 2018, cash and short-term investments balance came in $5.1 billion which is in line with the figure as of Jun 30, 2018.
The company generated $2.12 billion of cash from operations, which increased from $1.82 billion in the previous quarter.
Capex was $370 million in the third quarter. Free cash flow at the end of the third quarter was $1.74 billion, which was up from $1.58 billion in the previous quarter.
At the end of the third quarter, it had long-term debt of $4.3 billion, down from $5.1 billion in the second quarter.
For fourth-quarter 2018, the company expects revenues between $3.6 billion and $3.9 billion.
Earnings are expected in the range of $1.14-$1.34 per share.
How Have Estimates Been Moving Since Then?
In the past month, investors have witnessed a downward trend in fresh estimates. The consensus estimate has shifted -7.17% due to these changes.
At this time, Texas Instruments has a great Growth Score of A, though it is lagging a lot on the Momentum Score front with a C. Charting a somewhat similar path, the stock was allocated a grade of D on the value side, putting it in the bottom 40% for this investment strategy.
Overall, the stock has an aggregate VGM Score of C. If you aren't focused on one strategy, this score is the one you should be interested in.
Estimates have been broadly trending downward for the stock, and the magnitude of these revisions indicates a downward shift. It's no surprise Texas Instruments has a Zacks Rank #4 (Sell). We expect a below average return from the stock in the next few months.
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