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Texas Instruments (TXN) Q2 Earnings: What's in Store?

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Texas Instruments Inc. (TXN - Free Report) is set to report second-quarter 2016 results on Jul 25. Last quarter, the company posted a 4.84% positive earnings surprise.

Let’s see how things are shaping up for this announcement.

TEXAS INSTRS Price and EPS Surprise

TEXAS INSTRS Price and EPS Surprise | TEXAS INSTRS Quote

Factors at Play

Texas Instruments or TI reported mixed first quarter results with earnings beating the Zacks Consensus Estimate but revenues missing the same. Though the communications, personal electronics and other markets were weak, the recovering auto and industrial markets helped the company to deliver good results.

Texas Instruments continues to prudently invest its R&D dollars in 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 as well as dollar content at customers, while reducing its exposure to the volatile consumer/computing markets.

The company along with chipmaker Intel remains one of the few semiconductor companies that depend on internal capacity for manufacturing the bulk of its devices. However, since it has the policy of building out capacity ahead of demand, it can make opportunistic purchases. As a result, the company has been able to contain capex at up to 4% of sales even while expanding.

TI provided strong revenue guidance for the second quarter. The company expects revenues between $3.07 billion and $3.33 billion (up 5.9% sequentially at the mid-point). The outlook includes acquisition charges of $80 million per quarter continuing till the third quarter of 2019, which will then decline to $50 million per quarter for the next two years. The annual effective tax rate and the rate to be applied for the second quarter will be around 30%.

This revenue guidance reflects lackluster demand for personal electronics, particularly PCs, and communications equipment.

Earnings per share in the quarter are expected to be in a range of 67 cents to 77 cents.

Earnings Whispers

Our proven model does not conclusively show that Texas Instruments is likely to 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 72 cents. Therefore, its Earnings ESP is 0.00%.

Zacks Rank: Texas Instruments has a Zacks Rank #4 (Sell). 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:

Open Text Corp. (OTEX - Free Report) with an Earnings ESP of +1.10% and Zacks Rank #1.

Silicon Motion Technology Corp. (SIMO - Free Report) with an Earnings ESP of +15.15% and Zacks Rank #1.

Black Knight Financial Services, Inc. , with an Earnings ESP of +3.45% and a Zacks Rank #2.

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