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Will Texas Instruments (TXN) Q3 Earnings Post a Surprise?
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Texas Instruments Inc. (TXN - Free Report) or TI is set to report third-quarter 2016 results on Oct 26 after the bell. Last quarter, the company posted a 5.56% positive earnings surprise.
Let’s see how things are shaping up for this announcement.
Factors at Play
Texas Instruments is currently riding high on strengthening auto and industrial markets. The communications market is also improving. Personal electronics and other markets remain weak but TI has done well to tackle the challenges.
Internally, the company has always executed rather well. It, along with chipmaker Intel (INTC - Free Report) , is one of the few semiconductor companies that depend on internal capacity for manufacturing the bulk of its devices. Since the company usually builds out capacity well ahead of demand, it is able to make opportunistic purchases. As a result, it is able to contain capex of up to 4% of sales even while on an expansion plan.
For instance, the 300mm capacity that it acquired a few years back is a huge support for its margins right now. According to management, the Richardson fab (RFAB) can be built to meet up to $5 billion in 300mm Analog demand. A second 300mm fab has been qualified, which will be split between Analog and Embedded production. Using 300mm capacity reduces cost by around 40%. Therefore, producing more of its chips at 300mm facilities will be a continued positive for gross margin going forward.
Overall, we remain optimistic about TI’s compelling product line, the differentiation in its business and lower-cost 300mm capacity that should in combination drive earnings. We note that channel inventories remain very low, meaning that demand is likely to remain strong.
Texas Instruments also continues to prudently invest its R&D dollars into several high-margin, high-growth areas of the analog and embedded processing markets. This is gradually increasing its exposure to the industrial and automotive markets and increasing dollar content at customers, while reducing its exposure to the volatile consumer/computing markets.
According to TI’s guidance for the third quarter, revenues are expected between $3.34 billion and $3.62 billion (up 3.5% sequentially at the mid-point). Non-cash amortization charges related to acquisitions will remain in the range of $80 million until the third quarter of 2019, declining to $50 million a quarter for two more years.
Earnings for the quarter are expected to be in a range of 81 to 91 cents. Capex target remains at 4% of revenue including expansion of 300mm capacity for Analog production.
Earnings Whispers
Our proven model does not conclusively show that Texas Instruments will beat estimates this quarter. This is because a stock needs to have both a positive Earnings ESP and a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) for this to happen. That is not the case here as you will see below.
Zacks ESP: Both the Most Accurate estimate and the Zacks Consensus Estimate are pegged at 86 cents. Therefore, its Earnings ESP is 0.00%.
Zacks Rank: Texas Instruments’ Zacks Rank #3 when combined with a 0.00% ESP makes surprise prediction difficult.
We caution against stocks with a Zacks Rank #4 or 5 (Sell-rated stocks) going into the earnings announcement, especially when the company is seeing negative estimate revisions.
Stocks to Consider
You may consider the following stocks, with a positive Earnings ESP and a favorable Zacks Rank:
NVIDIA Corp. (NVDA - Free Report) , with an Earnings ESP of +8.93% and a Zacks Rank #3.
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Will Texas Instruments (TXN) Q3 Earnings Post a Surprise?
Texas Instruments Inc. (TXN - Free Report) or TI is set to report third-quarter 2016 results on Oct 26 after the bell. Last quarter, the company posted a 5.56% positive earnings surprise.
Let’s see how things are shaping up for this announcement.
Factors at Play
Texas Instruments is currently riding high on strengthening auto and industrial markets. The communications market is also improving. Personal electronics and other markets remain weak but TI has done well to tackle the challenges.
Internally, the company has always executed rather well. It, along with chipmaker Intel (INTC - Free Report) , is one of the few semiconductor companies that depend on internal capacity for manufacturing the bulk of its devices. Since the company usually builds out capacity well ahead of demand, it is able to make opportunistic purchases. As a result, it is able to contain capex of up to 4% of sales even while on an expansion plan.
For instance, the 300mm capacity that it acquired a few years back is a huge support for its margins right now. According to management, the Richardson fab (RFAB) can be built to meet up to $5 billion in 300mm Analog demand. A second 300mm fab has been qualified, which will be split between Analog and Embedded production. Using 300mm capacity reduces cost by around 40%. Therefore, producing more of its chips at 300mm facilities will be a continued positive for gross margin going forward.
Overall, we remain optimistic about TI’s compelling product line, the differentiation in its business and lower-cost 300mm capacity that should in combination drive earnings. We note that channel inventories remain very low, meaning that demand is likely to remain strong.
Texas Instruments also continues to prudently invest its R&D dollars into several high-margin, high-growth areas of the analog and embedded processing markets. This is gradually increasing its exposure to the industrial and automotive markets and increasing dollar content at customers, while reducing its exposure to the volatile consumer/computing markets.
TEXAS INSTRS Price and EPS Surprise
TEXAS INSTRS Price and EPS Surprise | TEXAS INSTRS Quote
According to TI’s guidance for the third quarter, revenues are expected between $3.34 billion and $3.62 billion (up 3.5% sequentially at the mid-point). Non-cash amortization charges related to acquisitions will remain in the range of $80 million until the third quarter of 2019, declining to $50 million a quarter for two more years.
Earnings for the quarter are expected to be in a range of 81 to 91 cents. Capex target remains at 4% of revenue including expansion of 300mm capacity for Analog production.
Earnings Whispers
Our proven model does not conclusively show that Texas Instruments will beat estimates this quarter. This is because a stock needs to have both a positive Earnings ESP and a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) for this to happen. That is not the case here as you will see below.
Zacks ESP: Both the Most Accurate estimate and the Zacks Consensus Estimate are pegged at 86 cents. Therefore, its Earnings ESP is 0.00%.
Zacks Rank: Texas Instruments’ Zacks Rank #3 when combined with a 0.00% ESP makes surprise prediction difficult.
We caution against stocks with a Zacks Rank #4 or 5 (Sell-rated stocks) going into the earnings announcement, especially when the company is seeing negative estimate revisions.
Stocks to Consider
You may consider the following stocks, with a positive Earnings ESP and a favorable Zacks Rank:
Veeco Instruments Inc. (VECO - Free Report) with an Earnings ESP of +17.86% and Zacks Rank #1. You can see the complete list of today’s Zacks #1 Rank stocks here.
NVIDIA Corp. (NVDA - Free Report) , with an Earnings ESP of +8.93% and a Zacks Rank #3.
Confidential from Zacks
Beyond this Analyst Blog, would you like to see Zacks' best recommendations that are not available to the public? Our Executive VP, Steve Reitmeister, knows when key trades are about to be triggered and which of our experts has the hottest hand. Click to see them now>>