“Armchair Trader Series” Recommendations
- Week Beginning -
Monday, December 03, 2018

by Ian Harvey

IMPORTANT NOTE: This is a recommendation and individual members can use their own discretion as to when to enter or exit!

You may also wish to read Stock Options Made Easy Trading Philosophy


"Trading Capital Management"

Option Trade – Texas Instruments Incorporated (NASDAQ:TXN) Calls

Tuesday December 04, 2018

** OPTION TRADE: Buy the TXN APR 18 2019 105.000 CALL at approximately $5.00.

Place a pre-determined sell at $10.00.

Also include a protective stop loss of $2.00.

Semiconductor stock Texas Instruments Incorporated (NASDAQ:TXN), headquartered in Dallas, Texas, an original equipment manufacturer of analog, mixed signal and digital signal processing (DSP) integrated circuits, is one of the most valuable publicly traded chip companies in the world, commanding a market capitalization of about $95 billion. The company is, unsurprisingly, extremely profitable, too. In 2017 it generated nearly $3.7 billion in net income, and according to analyst estimates, that figure is set to rise to about $5.57 billion in 2018.

Texas Instruments' success comes from the development of analog and mixed-signal chipsets, which are harder to perfect and therefore harder for competitors to duplicate. This provides Texas Instruments a wide and relatively deep moat in the analog and embedded chip sector.

For an understanding of Analog semiconductors - they regulate functions like temperature, speed, sound, and electrical current and convert this data into digital signals useable by digital semiconductors. In short, they provide the data that digital chips need for processing information over the internet.

TXN dominates the analog industry -- holding 69% market share. The company generates about 95% of its revenue from semiconductors and digital signal processors. The other 5% of revenues comes from the company's ubiquitous calculators.

Texas Instruments' shares have delivered market-beating returns to investors over the last decade. The company still makes calculators and chips for personal electronics, but in recent years TI has been making chips for major industries like transportation and energy, which have become increasingly more computerized. This has opened up new avenues of growth for the chipmaker.

Shares have more than doubled over the last three years.

About Texas Instruments …..

Texas Instruments Incorporated designs, manufactures, and sells semiconductors to electronics designers and manufacturers worldwide. It operates in two segments, Analog and Embedded Processing. The Analog segment offers power products to manage power requirements in various levels using battery management solutions, portable components, power supply controls, point-of-load products, switches and interfaces, integrated protection devices, high-voltage products, and mobile lighting and display products.

Past Performance…..

Texas Instruments delivered third-quarter 2018 earnings of $1.58 per share, beating the 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.

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. 

Future Earnings…..

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.

Analysts expect Texas Instruments to turn in EPS of $5.54 next year -- a figure that's ever so slightly lower than what they think it'll deliver in 2018

Influencing Factors…..

Texas Instruments throws a lot of its free cash flow at buying back stock, which means that a company can actually increase EPS by buying back enough shares to bring its overall share count down.

By bringing down its share count, Texas Instruments is -- for a given level of net income -- increasing EPS and free cash flow per share, which should ultimately translate into greater dividend-paying capacity for a fixed amount of capital.

Over the last four quarters management has repurchased approximately $3.8 billion in shares, equal to 4.2% of its current market capitalization.

A report by Market Research Trend suggests IoT will grow at a compound annual growth rate (CAGR) of 19.7% through 2022 -- valuing the IoT market at nearly $2.5 trillion. That's not $19 trillion, but it's a trend investors can ride to incredible profits.

Over the past 12 months, the company's revenues have grown by more than 12% to $15.7 billion. Earnings before interest, taxes, depreciation, and amortization (EBITDA) grew by 16.7% over that same period.

Also, the company's free cash flow has grown by 44.2%. Free cash flow is the money left over after a company pays its operating expenses and capital expenditures (CAPEX). In other words, it's the money a company has available for dividends, stock buybacks, and debt repayment.

As well, gross margins for the company rose from 52% in 2013 to 64% last year. Analysts' expectations are for the margin to continue expanding -- reaching 67% through 2022.

TI manufactures most of its products in-house, allowing for tighter control over costs. This approach also gives management more flexibility to invest in new technologies that increase manufacturing efficiency over time. Currently, TI is transitioning from 200-millimeter analog wafers to 300-millimeter ones, which are 40% cheaper to make. This should significantly reduce manufacturing costs and firm up margins.

TI also maintains a cost advantage by opportunistically acquiring manufacturing equipment ahead of demand when prices are cheap. It's this constant focus of squeezing more efficiency and profit out of operations that allows TI to generate a growing stream of free cash flow that it can distribute to shareholders.

Moving Forward…..

TI makes chips for various consumer electronics, including TVs and home appliances. The company also provides power management components for Apple 's iPhone XS. Last year, chip sales for personal electronics made up 25% of revenue.

Industrial and automotive are TI's fastest-growing markets, and together made up 54% of revenue in 2017. This includes chips used for factory automation, infotainment systems in cars, vehicle electronics and lighting, advanced driver assistance systems, and display panels. These are just a handful of the many applications for TI's chips.

Management believes most of the company's growth will come from industrial and automotive over the next decade. Cars are increasingly becoming more complicated under the hood, which plays right into TI's hands. Semiconductor sales to automakers have increased more than threefold to $30 billion since 1995. That amount is expected to continue growing as electric vehicles and self-driving cars become more widely adopted starting as early as 2020. As a result, TI could see booming demand over the next decade.

Analysts expect the chipmaker to grow earnings 14.4% over the next five years, which is consistent with TI's five-year growth rate of 13.5%.

Analysts Opinions

Several equities analysts have recently commented on the company…..

  • KeyCorp assumed coverage on Texas Instruments in a report on Tuesday, September 25th. They set a “sector weight” rating for the company.
  • Zacks Investment Research raised Texas Instruments from a “sell” rating to a “hold” rating in a report on Monday, October 8th.
  • Loop Capital lowered their price target on Texas Instruments to $120.00 and set a “buy” rating for the company in a report on Wednesday, October 24th.
  • BidaskClub raised Texas Instruments from a “sell” rating to a “hold” rating in a report on Friday, August 10th.
  • Finally, Mizuho lowered their price target on Texas Instruments to $105.00 and set a “neutral” rating for the company in a report on Wednesday, October 24th.

Two analysts have rated the stock with a sell rating, fourteen have assigned a hold rating and sixteen have given a buy rating to the stock. The stock currently has an average rating of “BUY” and a consensus target price of $117.11.

Insider news……

Director Martin S. Craighead purchased 10,900 shares of Texas Instruments stock in a transaction on Thursday, October 25th. The shares were purchased at an average price of $91.70 per share, for a total transaction of $999,530.00. Following the transaction, the director now owns 13,100 shares of the company’s stock, valued at approximately $1,201,270.


Texas Instruments notes it has lowered its outstanding shares by 44%, increased dividends for 15 straight years, and has grown free cash flow 8% every year since 2004.

The company's business has been growing at a rapid clip, with trailing-12-month free cash flow for the period ending Sept. 30 rising 40% year over year.

TXN will be looking to display strength as it nears its next earnings release, which is expected to be January 22, 2019. On that day, TXN is projected to report earnings of $1.24 per share, which would represent year-over-year growth of 13.76%. Meanwhile, the Consensus Estimate for revenue is projecting net sales of $3.75 billion, up 0.04% from the year-ago period.

The company has a debt-to-equity ratio of 0.41, a current ratio of 3.97 and a quick ratio of 3.09. The firm has a market capitalization of $95.91 billion, a PE ratio of 23.64, a PEG ratio of 1.94 and a beta of 1.29.