Investors Should Keep Texas Instruments Incorporated On Their Radar

Texas Instruments Incorporated (TXN) has plummeted over 12% from its all-time high. While the stock does face some headwinds over the near-term due to its cyclical nature, it remains an attractive stock for long-term investors, both from capital gains and dividend-income perspective. Its heavy exposure to the industrials sector amid the trade war is presently a liability for shareholders, but this certainly does not undermine its growth opportunities over the long-term.

TXN recently issued not only weak Q3 earnings, but also weaker than expected guidance for Q4 2019 (range between $3.07 billion and $3.33 billion vs. $3.59 billion expected). The main reason was a weak global macro backdrop, which tends to hurt cyclical sectors like chip stocks more. However, TXN was especially hard hit due to its high sales exposure to two highly cyclical sectors to which it supplies analog and embedded chips: 36% exposure to industrials sector and 20% to automotive sector, both of which are suffering presently amid an industrial/ manufacturing recession. Additionally, a 44% exposure to China does not help either amid the ongoing trade war.

However, whenever we see signs of easing global trade tensions and a rebound in the industrials/ manufacturing sector, this is a stock would be one of the best securities to play the consequent rally. While currently its bets are not paying off due to dire global macro conditions, it certainly is well positioned to benefit from secular growth trends over the long-term, such as the trend towards autonomous vehicles.

Furthermore, TXN is great security for income investors, as it currently yields around 3%, and if it gets cheaper from here its yield could climb to even more attractive levels. As global interest rates continue to fall, it is likely that rates will remain low for extended periods of time. In fact, on Oct. 30 Fed chairman Powell assured the market that they would not be raising rates until they see significant improvement in inflation levels. This will boost demand for high-dividend paying stocks like TXN as investors search for higher yields, which offers another reason to hold it in one’s portfolio.

The fundamentals of this stock are also remarkably strong. TXN offers a Return on Equity of 55.38% and a Return on Invested Capital of 35.61%. Moreover, the company also continues to deliver strong yoy profit margin expansion, with the 3-year annualized growth rate for Operating Income at 15.38%, and for Net Income at 23.17%, even with an ongoing trade war since beginning last year. This has propelled the stock to rally by over 135% over the past 5 years, and the company is certainly able to continue delivering strong financial performance to support its stock price higher over the long run.

Bottom Line

While Texas Instruments Incorporated stock has suffered a notable pullback recently due to weak earnings guidance amid a slowing global economy and industrials/ manufacturing recession, investors should keep this stock under their radar as it becomes cheaper, because it is an attractive play for a future economic rebound, secular growth trends and an attractive yield in a low-interest rate environment.