Texas Instruments: A Sleeper Blue Chip Worth Watching
I’m watching this sleeper blue chip tech stock with anticipation as it approaches its earnings release on October 26, 2021.
Drive By Analysis…Not
I drive by this iconic semiconductor company’s Richardson, Texas factory on Interstate 635 on a frequent basis and I always wonder what the stock will do when it releases its earnings. Most often the shares drop on the news and soon after starts to rally as dip buyers come in. This has been especially true during the recently challenging period for the semiconductor industry.
Of course, I’m talking about Texas Instruments (NSDQ: TXN), a free cash flow and dividend generating monolith with its hands in just about every phase of the chip sector.
I’ll be perfectly honest here. Being a momentum investor by nature, I’d like to see a breakout before I trade this stock. Yet, there isn’t a time that I can remember where I haven’t studied its price chart and kept up with the company looking for that spark that will lead to a big move higher. On the other hand, if you’re not a momentum investor, this may be a company whose shares are worth considering if you’re patient and like dividends, as I’ll describe below.
Patience Is a Virtue
O.K. I know that many semiconductor stocks are in a world of hurt these days. Supply chain worries, labor shortages, international politics and just about everything else seems to be getting in their way. But if you’re thinking about the long term, consider the fact that electric and autonomous cars are just getting started and that the work-from-home dynamic isn’t going anywhere.
In other words, the demand for chips isn’t likely to decrease anytime soon. In fact, more than likely it will increase over time. Moreover, with those two central demand dynamics driving the potential for growth, companies like Texas Instruments that manage their current challenges best are the most likely to be the future leaders.
And here’s an example of how TXN is going about it. While other companies are scrambling to keep the doors open, TXN has been busy buying assets including former competitor National Semiconductor as well as a U.S. chip factory from Micron Technology (NSDQ: MU). This means that while in the short term, earnings may be impacted to some degree due to acquisition costs, TXN is actually adding manufacturing capacity for the present and the future, especially in the U.S. where it can control its supply chains more consistently.
Meanwhile, even in these difficult times, TXN delivered $4.6 billion in revenues in its last quarter, a 41% increase year over year, while generating over 30% or higher growth in most measures . Even more remarkable is the fact that TXN raised its dividend to $1.15 per quarter ($4.60- per year/2.4o%). In addition, the odds of another dividend hike for the next fiscal year and a continuation of the company’s stock buyback program are almost guaranteed, since this has been their practice for years.
Trading Range Is a Long-Term Opportunity
Of course, the real question is whether to own the shares or not. And in this case, for those with a long-term time frame, a slow accumulation may make some sense along with perhaps a Buy-Write option strategy where you own the stock and sell call options for the premium and collect the dividend simultaneously. Again, it may be wise to see what happens with the upcoming earnings.
The stock is currently range bound with money moving in slowly between $185-$190, which makes it an ideal candidate for a Buy-Write strategy. Accumulation Distribution (ADI) is positive and On Balance Volume (OBV) is neutral, facts that go along with the sideways movement of the stock. Thus, given that these measures of money flow are not in synch, the stock is moving sideways as money moves in and out with fits and starts.
So, what’s the most likely reason for the stock’s price to have held up this well? It all comes down to management under-promising and over-delivering strategy, which is especially salient during earnings calls where guidance is conservative and the stock tends to dip offering an opportunity to buy shares.
What’s the Bottom Line?
The bottom line is that Texas Instruments remains a premier company in the semiconductor sector. Its management team and management style are relics of old: conservative, unpretentious, and cautious while consistently delivering above expectations. In this case, however, old is good.
Moreover, it’s almost a given that when the semiconductor sector cycle finally turns again, which it will at some point in the future, TXN’s stock is likely to once again move higher. Meanwhile, it’s worth considering as an income producing vehicle for patient investors.
For momentum investors, a price breakout above $200 would likely signal a significant move higher over the next few weeks.
I’ll keep an eye on Texas Instruments as I drive by, monitoring the price chart. Rest assured, though, that this company’s management and shares are as reliable as the onslaught of heat in a Lone Star summer.
Editor’s Note: Looking for the next outsized growth opportunity? An analyst with a time-proven track record for pinpointing profit catalysts before they happen is our colleague, Jim Pearce.
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