Texas Instruments Q2 Preview: Fade The Rally - Too Expensive Here

Investment Thesis - Texas Instruments (TXN) is currently viewed as expensive with no margin of safety, despite its robust profit margins and potential benefits from the Chips Act [2][5] - The company has experienced a significant stock price rally of +34.6% since the October 2023 low, reaching a peak of $206 [3] Financial Performance - TXN's revenue guidance for FQ2'24 is $3.8 billion, reflecting a QoQ increase of +3.8% but a YoY decline of -16.1% [3] - The adjusted EPS for FQ2'24 is projected at $1.15, down -5.7% QoQ and -38.5% YoY, indicating a potential sequential improvement in top-line performance [3] - Gross margins are expected to stabilize around 57.1%, down from 63.6% in FY2019 [3] Market Segments - TXN's revenue breakdown for FY2023 shows 40% from Industrial applications, 34% from Automotive, 15% from Personal Electronics, 5% from Communications, 4% from Enterprise, and 2% from other segments [3] - The Industrial market is still facing challenges, while new Automotive purchases are hindered by high borrowing costs [3] Strategic Focus - TXN is focusing on establishing a geopolitically dependable capacity, which is crucial given the current global supply chain dynamics [4] - The company has increased R&D and SG&A expenses to $3.7 billion and capex to $5.3 billion, indicating a commitment to future growth [4] Debt and Cash Flow - TXN's net debts have increased to -$3.79 billion in FQ1'24, up from -$2.64 billion in FQ4'23, raising concerns about balance sheet health [4] - The LTM Free Cash Flow generation has significantly declined to $940 million, down -78.6% sequentially [4] Valuation Metrics - TXN's forward P/E ratio is currently at 36.65x, significantly higher than its historical mean of 27.68x and the sector median of 23.88x [7] - The company is expected to achieve a CAGR of +4.5% in revenue and +3.3% in EPS through FY2026, which is relatively modest compared to peers [8] Dividend and Yield - TXN has raised its quarterly dividend by +4.8% to $1.30, resulting in a forward dividend yield of 2.69%, which is less attractive compared to US Treasury yields [10]