Chipmaker Texas Instruments (TXN, Financial) posted some fantastic numbers for the third quarter of 2014, despite expected slowdown in chip demand. It witnessed strong demand for its chips utilized in communication equipment, industrial and automotive markets. Its transformational pains are yielding higher sales and improved margins. Also, its better product portfolio continues to fetch new customers to its fold that should enhance its growth in the long run. Its results surpassed the analysts' estimates on both the top as well as bottom lines for the quarter.
The right moves are showing results
The Dallas, Texas-based company, for the third quarter posted revenue of $3.50 billion, an uptick of 8% as compared to $3.24 billion in the same quarter last year. The analysts were expecting revenue of $3.46 for the quarter. Also, its net income for the quarter surged 31% to $826 million or earnings of $0.76 per share as against net income of $629 million or earnings of $0.56 per share in the same period a year ago. Its earnings also topped the average analysts’ estimates of $0.71 per share for the quarter.
Looking forward, the chipmaker for the fourth quarter expects its revenue to be in the range of $3.13 billion to $3.39 billion. This represents approximatelyan  8% increase over the same quarter last year. Also, the high range of the revenue exceeds the average analysts’ forecasts of $3.26 billion for the fourth quarter of 2014. Its earnings per share for the current quarter are anticipated to range between $0.64 and $0.74 per share. The analysts have been modeling earnings of $0.69 per share for the current quarter.
A good strategy
The chipmaker is experiencing tremendous growth for its core business segments such as analog ICs and embedded processing. Its analog products such as high volume analog and logic, high performance analog and Silicon Valley analog are fetching great deal for the company in the market. Also, products like microcontrollers, connectivity and processors continue to grow at a healthy rate for its embedded processing segment.
Since exiting the mobile phone and tablet market due to competition from Qualcomm (QCOM, Financial), the company is continually engaged in upgrading and enhancing its core business with better offerings in both of these categories listed above. Moreover, these segments are less volatile as compared to mobile and tablet markets and offer a good long-term growth opportunity for the company. Texas Instruments expects to capture additional market share in these segments in fiscal 2014. Also, its higher revenue and improved product portfolio should alleviate its top line growth this quarter. Both these segments such as analog and embedded processing registered 11% and 6% growth respectively in the reported quarter.
In addition, its efficient manufacturing operations and wide-spread sales channels are driving its growth much faster than expected. The company continues to convert its distribution sales to consignment model. Also, the chipmaker has now effectively integrated its inventory to the consignment program. Additionally, the consignment program assists the company at times of change in demand due to distribution inventory and facilitates the chipmaker with the greater flexibility to better meet the customer demand in the end market. Moreover, Texas continues to convert its distribution sales to consignment that should generate better sales for the company in the long run. Its consignment is up about 10% year-on-year basis.
Texas Instruments continues to market aggressively its emergent 300 millimeter output. Besides, it is also effectively executing its strategy of purchasing assets well ahead of demand at the stressed prices. In fact, it estimates its sales force team to be approximately three to four times greater than its direct competitors. Moreover, its sales matrix that resides at revenue per sales per person should certainly enhance its top line growth at a much faster rate than its competitors. Also, the company remains quite strong on its execution, coupled with disciplined allocation of its capital that should certainly drive its growth in the long-run.
Conclusion
Texas Instruments is certainly a great pick. Its analog and embedded processing are fetching extra market share for the company. It is also effectively integrating its consignment models with its distribution channels across the world that should improve its sales. The analysts have estimated CAGR of 10.00% for the next five years. Also, the analysts have forecasted CAGR of 31.40% for this year and 13.90% for the next year respectively that unveils short-term gain on the stock.
The company is trading at the trailing P/E of 21.92 and forward P/E of 17.36 that indicate fair valuation for the stock that has a lot of rooms to grow in the market. Also, its PEG ratio of 1.98 continues to support its growth over the long run. Its balance sheet carries total cash of $3.19 billion and has total debt of $4.64 billion. Also, it has operating cash flow of 3.82 billion and leveraged free cash flow of $3.27 billion.
