Every Thursday we bring you recommended U.S. stocks. These picks come from our newsletter on U.S. stock investing, Wall Street Stock Forecaster,or from our advisory for more aggressive investing, Stock Pickers Digest. Today we explain why one tech stock’s decision to stop making chips for mobile phones makes it one of our best U.S. stocks to invest in.
TEXAS INSTRUMENTS INC. (Nasdaq symbol TXN; www.ti.com) gets 65% of its revenue from analog chips, which convert inputs like touch, sound and pressure into signals computers can understand. Manufacturers use these chips in a variety of products, such as cars, medical devices and appliances.
The company gets a further 20% of its revenue by making embedded processor chips, which perform mathematical calculations. Many clients supply their own software for these chips. This gives Texas Instruments an opportunity to form long-term relationships with these users, as it helps them adapt their software to the new chips. That makes these customers less likely to switch to other chipmakers.
Handheld calculators, specialized chips and licensing fees provide the remaining 15% of revenue.
Intense competition from other chipmakers has prompted Texas Instruments to stop making digital chips for mobile phones and focus more on analog chips. As part of this plan, it bought analog chipmaker National Semiconductor for $6.5 billion in 2011.
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Stocks to invest in: Company should profit from demand for analog chips to connect products to the Internet
Texas Instruments’ revenue fell 12.6%, from $14.0 billion in 2010 to $12.2 billion in 2013 as it wound down its mobile chip business. Its revenue then rebounded to $13.0 billion in 2014.
Earnings declined 45.5%, from $3.2 billion in 2010 to $1.8 billion in 2012. Per-share profits fell 42.4%, to $2.62 from $1.51, on fewer shares outstanding. Earnings then turned around and rose to $1.75 a share (or a total of $2.0 billion) in 2013 and $2.57 a share (or $2.8 billion) in 2014.
Analog chips tend to have longer life cycles than digital chips, which is partly why Texas Instruments’ research costs fell 10.8%, to $1.4 billion (or 10.4% of revenue) in 2014 from $1.5 billion (or 12.5%) in 2013. The switch to analog chips also means the company needs to spend less on new manufacturing gear, so its capital spending fell 6.6% in 2014.
Texas Instruments is using these savings to buy back more shares; the company has cut the number of shares outstanding by 39% in the past 10 years. It has also raised its dividend annually for the past 11 years. The current annual rate of $1.36 yields 2.5%.
The company’s sound balance sheet will let it keep expanding. As of March 31, 2015, its long-term debt was $3.6 billion, or just 7% of its market cap. It also held cash of $3.3 billion, or $3.16 a share.
The stock gained 13% in the past year and now trades at 20.0 times the $2.70 a share Texas Instruments will probably earn in 2015.
That’s a reasonable multiple, particularly in light of the fact that manufacturers will need the company’s analog chips to connect more of their products and equipment to the Internet. This allows for remote monitoring, which lets them catch problems earlier.
Recommendation in Wall Street Stock Forecaster: BUY.
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