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Why Is Texas Instruments (TXN) Down 2.3% Since Last Earnings Report?

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It has been about a month since the last earnings report for Texas Instruments (TXN - Free Report) . Shares have lost about 2.3% in that time frame, underperforming the S&P 500.

Will the recent negative trend continue leading up to its next earnings release, or is Texas Instruments due for a breakout? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at the most recent earnings report in order to get a better handle on the important catalysts.

Texas Instruments Beats on Q3 Earnings

Texas Instruments reported third-quarter 2019 earnings of $1.49 per share, which surpassed the Zacks Consensus Estimate by 8 cents. Further, the figure came within management’s guided range of $1.31-$1.53.

However, the reported figure declined 5.7% year over year but improved 9.6% sequentially.

The company reported revenues of $3.771 billion which came within management’s guided range of $3.65-$3.95 billion. The figure is up 2.8% from the previous quarter.

However, the figure missed the Zacks Consensus Estimate of $3.81 billion. Further, it declined 11% from the year-ago quarter.

Sluggishness in the company's Analog and Embedded Processing segments owing to weakening end-market conditions affected year-over-year top line growth.

This quarter marks the company’s fourth consecutive quarter of declining growth on a year-over-year basis.

Nevertheless, the company’s focus on innovation of product portfolio across both the segments is evident from growing research and development (R&D) spending. This continues to be a key catalyst. Further, Texas Instruments continues to increase investments in the automotive and industrial markets, which are anticipated to yield good returns in the long run.

Moreover, the company remains confident on portfolio strength, efficient manufacturing strategies and optimized capital allocation in growth areas.

End-Market in Detail

Texas Instrument’s revenues were down by upper-single digit in the industrial, automotive and personal electronics markets. This can be attributed to macro-economic headwinds and U.S.-China trade tensions.

Further, the company witnessed sluggishness in the communications equipment market during the reported quarter as evident from revenue decline of 35% year over year. Texas Instruments witnessed weak momentum across all its major customers.

Additionally, the company encountered weakness in the enterprise systems space.

Segments in Detail

Analog: The company generated $2.674 billion from this segment (70.9% of total revenues), which decreased 8% from the year-ago quarter. This can be attributed to weak performance of high-volume, signal chain and power product lines.

Embedded Processing: This segment generated $724 million revenues (19.2% of total revenues), down 19% year over year. This was primarily owing to weak performance of processors and connected microcontrollers.

Other: Revenues in this segment were $373 million (9.9% of total revenues). The figure was down 19% from the year-ago quarter.

Operating Details

Texas Instruments’ gross margin of 64.9% contracted 90 bps from the year-ago quarter.

Selling, general and administrative (SG&A) and R&D expenses were $399 million and $379 million, which expanded 130 bps and 90 bps, respectively, in the reported quarter.

Operating margin was 42.1%, contracting 340 bps from the prior-year quarter.

Balance Sheet and Cash Flow

As of Sep 30, 2019, cash and short-term investments balance came in $5.1 billion, which increased from $4.2 billion as of Jun 30, 2019.

At the end of the reported quarter, the company had long-term debt of $5.3 billion, up from $4.6 billion in the prior quarter.

The company generated $1.9 billion of cash from operations, up from $1.8 billion in the previous quarter.

Capex was $149 million in the third quarter. Further, free cash flow stood at $1.84 billion.

Additionally, Texas Instruments paid out dividends worth $721 million during the reported quarter. Further, it repurchased shares worth $456 million.

Guidance

For fourth-quarter 2019, the company expects revenues between $3.07 billion and $3.33 billion.
Earnings are expected in the range of $0.91-$1.09 per share. The guidance includes an estimated $5 million discrete tax benefit.

How Have Estimates Been Moving Since Then?

In the past month, investors have witnessed a downward trend in estimates revision. The consensus estimate has shifted -20.53% due to these changes.

VGM Scores

Currently, Texas Instruments has a nice Growth Score of B, though it is lagging a lot on the Momentum Score front with a D. Following the exact same course, the stock was allocated a grade of D on the value side, putting it in the bottom 40% for this investment strategy.

Overall, the stock has an aggregate VGM Score of C. If you aren't focused on one strategy, this score is the one you should be interested in.

Outlook

Estimates have been broadly trending downward for the stock, and the magnitude of these revisions indicates a downward shift. It's no surprise Texas Instruments has a Zacks Rank #4 (Sell). We expect a below average return from the stock in the next few months.


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