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Texas Instruments (TXN) Down 9.8% Since Last Earnings Report: Can It Rebound?

Zacks Equity Research
IQIYI, Inc. Sponsored ADR (IQ) closed the most recent trading day at $18.16, moving -1.73% from the previous trading session.

A month has gone by since the last earnings report for Texas Instruments (TXN). Shares have lost about 9.8% in that time frame, underperforming 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 Q1 Earnings & Revenues

Texas Instruments reported first-quarter 2019 earnings of $1.26 per share, which came within management’s guided range of $1.03-$1.21.

Excluding discreet tax benefit of 4 cents from the reported figure, earnings of $1.22 per share comfortably surpassed the Zacks Consensus Estimate of $1.13. However, the reported figure decreased 6.7% year over year and 0.8% on a sequential basis.

The company delivered revenues of $3.59 billion, beating the Zacks Consensus Estimate of $3.48 billion. Further, the figure came within the company’s guided range of $3.34-$3.62 billion. However, the figure was down 5% from the year-ago quarter and 3.3% sequentially.

Decline in demand in the reported quarter affected the company's Analog and Embedded Processing businesses, in turn the top line.

Nevertheless, the company’s focus on innovation of product portfolio is evident from its growing research and development (R&D) spending. This continues to be a key catalyst. Moreover, the company remains confident on its 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 expected to yield good returns.

All these endeavors have aided the company in winning shareholders’ confidence.

End-Market in Detail

Softness in demand environment affected the Texas Instrument’s performance in the industrial and automotive market where revenues were down in mid-single digit.

It also affected the company’s presence in personal electronics market where revenues were down in low-double digits. Further, sluggish PC and smartphone markets remained headwinds.

However, the company performed better than expected in the communications equipment market in the first quarter, thanks to shipment of products required for 5G technology. Revenues in this market were up 30% from the year-ago quarter.

Segments in Detail

Analog: The company generated $2.52 billion from this segment (70.1% of total revenues), which decreased 1.9% from the year-ago quarter. This was due to weak performance of high-volume and power product lines. Reduced factory loading also affected this segment. However, the segment experienced strong performance of signal chain products.

Embedded Processing: This segment generated $796 million revenues (22.1% of total revenues), down 14% year over year. This was primarily owing to weak performance of processors and connected microcontrollers, and reduced factory loadings during the reported quarter. Further, the segment failed to leverage the increasing 5G content.

Other: Revenues in this segment were $280 million (7.8% of total revenues). The figure was down 5.7% from the year-ago quarter.

Operating Details

Texas Instruments’ gross margin of 62.9% was down 170 bps from the year-ago quarter.

Selling, general and administrative (SG&A) and R&D expenses were $414 million and $389 million, respectively, in reported quarter. We note that SG&A figure went down 4.4% but R&D expenses were up 1% on a year-over-year basis.

Operating margin was 38.4%, contracting 240 bps from the prior year quarter.

Balance Sheet and Cash Flow

As of Mar 31, 2019, cash and short-term investments balance came in $4.1 billion which was down from $4.2 billion as of Dec 31, 2018.

At the end of the reported quarter, the company had long-term debt of $5.1 billion, up from $4.3 billion in the prior quarter.

The company generated $1.12 billion of cash from operations, down from $2.14 billion in the previous quarter.

Capex was $251 million in the first quarter. Free cash flow stood at $856 million.

Guidance

For second-quarter 2019, the company expects revenues between $3.46 billion and $3.74 billion.

Earnings are expected in the range of $1.12-$1.32 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 a downward trend in fresh estimates.

VGM Scores

Currently, Texas Instruments has a great Growth Score of A, though it is lagging a lot on the Momentum Score front with an F. 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.

Outlook

Estimates have been broadly trending downward for the stock, and the magnitude of these revisions indicates a downward shift. 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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