What To Expect From Texas Instruments’ Q3 Earnings?

Texas Instruments (NASDAQ:TXN) is poised to report its Q3 results in the coming weeks. We expect the company’s revenues for the quarter to decline by about 10% year-over-year to $4.14 billion, coming in slightly ahead of estimates, while earnings are likely to come in at $1.38 per share, roughly in line with estimates. While the broader semiconductor industry has seen a recovery from a cyclical downturn in recent quarters led by the surge in demand for artificial intelligence chips, and a modest recovery in the personal computer market, Texas Instruments has been witnessing some headwinds as major customers scale back on purchases. See our analysis of Texas Instruments Earnings Preview for a closer look at what to expect when the company publishes Q3 results.

Over Q2, sales declined by about 16% year-over-year to $3.82 billion, while earnings came in at $1.22 per share. The company’s product lineup – which includes analog semiconductors and embedded systems – is seen to be more dependent on macroeconomic factors, compared to other parts of the semiconductor industry. In the automotive market, customers are reducing inventory built up after pandemic-related supply chain issues. The industrial segment, which includes analog products like amplifiers, power management devices, and specialized processors, is also witnessing some weakness. The communications equipment sector also scaled back purchases due to a slowdown in 5G network deployment, especially in the U.S. Texas Instruments margins have also faced pressure, with gross margin contracting almost 600 basis points to 58% over the last quarter, impacted by the smaller revenue base as well as slightly higher production costs associated with reduced factory utilization.

The increase in TXN stock over the last 4-year period has been far from consistent, although annual returns were considerably less volatile than the S&P 500. Returns for the stock were 18% in 2021, -10% in 2022, and 6% in 2023. In contrast, the Trefis High Quality (HQ) Portfolio, with a collection of 30 stocks, is less volatile. And it has outperformed the S&P 500 each year over the same period. Why is that? As a group, HQ Portfolio stocks provided better returns with less risk versus the benchmark index; less of a roller-coaster ride as evident in HQ Portfolio performance metrics. Given the current uncertain macroeconomic environment around rate cuts and multiple wars, could TXN face a similar situation as it did in 2021 and 2023 and underperform the S&P over the next 12 months – or will it see a strong jump?

There are some positives for Texas Instruments. Semiconductor content is expected to grow steadily in the coming years in the industrial sector, as automation of productions gathers pace and labor costs continue to rise. The automotive sector is also expected to see strong growth in semiconductor content, driven by connected and self-driving vehicles.  The Industrial and automotive sectors together accounted for about 75% of TI revenue in 2023 and the two end markets have expanded at an annual rate of 10% since 2013. This trend could continue going forward as well.

The company also invested considerably to expand its 300mm wafer fabrication capacity in the U.S. This helps reduce geopolitical risks, while also improving efficiency and long-term competitiveness. Texas Instruments is also scaling back its capital spending after aggressively expanding its manufacturing capacity, investing $5.1 billion last year and planning around $5 billion in spending over 2024 and 2025. The company has now reduced its longer-term capital spending forecast for 2026 from $5 billion to a range of $2 to 5 billion.

The company also noted that it anticipates a significant increase in free cash flow, estimating $8 to $12 per share by 2026, which is well above consensus estimates and up from approximately $6.50 per share in 2022. This shift comes after activist investor Elliott took a $2.5 billion stake in the company, pushing for improved cash flow management. We value Texas Instruments at about $198 per share, which is roughly in line with the current market price of $201. We will be updating our price estimate post Q3 results. See our analysis of Texas Instruments Valuation: Expensive or Cheap for a closer look at what’s driving our price estimate for Texas Instruments.

[1] Returns as of 10/17/2024
[2] Cumulative total returns since the end of 2016

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