On Wednesday, Evercore ISI lifted its price target on shares of Texas Instruments (NASDAQ:TXN) to $298 from $268, while retaining an Outperform rating on the stock. The firm anticipates a strong fourth quarter for the company, projecting revenues of $4.1 billion, which exceeds the high end of Texas Instruments' own forecast range of $3.7 to $4.0 billion.
The analyst from Evercore ISI cited historical patterns where Texas Instruments achieved revenue figures at or above the upper end of its guidance, thanks to factors such as inventory declines among Electronic Manufacturing Services (EMS) and Distributors (Disti), inventories falling below the long-term trendline, and the company's shipments trailing behind consumption. These factors are believed to be currently in play, setting the stage for potential revenue surprises through 2025.
Texas Instruments has seen significant growth in its automotive revenues, which increased despite a weaker performance in Europe, with strength in China compensating for the shortfall. The company reported a higher-than-expected quarter-over-quarter auto revenue growth. Additionally, Texas Instruments has noticed a broadening cyclical recovery, with substantial growth in personal electronics, enterprise systems, and communications equipment, sectors that are still below their previous peak levels.
The analyst also noted that Texas Instruments' inventories rose by $190 million to $4.3 billion in the third quarter of 2024. While factory loadings are expected to be reduced in the fourth quarter, inventory levels are anticipated to reach around $4.5 billion. Despite this, the firm expects Texas Instruments to maintain flat inventory levels beyond the December 2024 quarter.
Gross margin headwinds are expected in the fourth quarter of 2024, with an estimated gross margin of 57%, which is below the Street's expectation of 58.8%. This is attributed to lower revenues and under-utilization, alongside higher depreciation costs related to the company's first fab in Sherman, which began depreciating in October.
In conclusion, Evercore ISI presents a positive outlook for Texas Instruments, emphasizing the company's potential for upward revisions over the next 4 to 6 quarters and its exit from a capital expenditure cycle that is expected to boost free cash flow per share from a twelve-month trailing trough of $1 to $12 by 2027. The analyst's price target of $298 falls within the calculated range based on projected free cash flow multiples from previous years.
In other recent news, Texas Instruments has projected its fourth-quarter revenue to fall below analysts' estimates due to a buildup in inventory levels. The company's forecasted revenue range is between $3.70 billion and $4.0 billion, short of the $4.07 billion average analysts had predicted. This projection reflects challenges in sectors like automotive, where an inventory surplus has slowed demand for the company's products.
In light of these developments, Mizuho has updated its outlook on Texas Instruments, raising the price target to $200 from $190, while keeping a neutral rating. Bernstein SocGen Group, however, has maintained its Underperform rating and expressed concerns about the company's fourth-quarter performance and potential overestimation of forward-looking financial estimates by the market.
On a positive note, Rosenblatt has maintained its Buy rating on Texas Instruments, anticipating that the company will meet its third-quarter expectations for 2024 and project sequential growth into the fourth quarter. This forecast is based on the company's steady booking and loading improvement as it enters a new up-cycle in the analog and embedded sectors.
InvestingPro Insights
Texas Instruments' strong market position and financial health are further underscored by recent data from InvestingPro. The company's market capitalization stands at an impressive $177.1 billion, reflecting its significant presence in the semiconductor industry. This aligns with the InvestingPro Tip highlighting TXN as a "prominent player in the Semiconductors & Semiconductor Equipment industry."
Despite the anticipated revenue decline mentioned in the article, TXN has demonstrated resilience in its dividend policy. An InvestingPro Tip reveals that the company "has raised its dividend for 21 consecutive years" and "has maintained dividend payments for 54 consecutive years." This commitment to shareholder returns is reflected in the current dividend yield of 2.8%, with a notable dividend growth of 9.68% over the last twelve months.
The company's P/E ratio of 33.56 and Price / Book ratio of 10.29 indicate that the stock is trading at premium valuations, which is consistent with the InvestingPro Tip stating it is "trading at a high earnings multiple." This premium valuation could be justified by the company's strong market position and potential for recovery as highlighted in the Evercore ISI analysis.
For investors seeking a more comprehensive analysis, InvestingPro offers 13 additional tips for Texas Instruments, providing a deeper understanding of the company's financial health and market position.
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