No. of Recommendations: 17
Texas Instruments TXN
Market Cap: 91 billion

Analysis of KARM Candidate TXN

Buying Criteria


1. Dominant brand -------> 0 - 1 point.
I will not leave you in suspense, I have given TXN 1/2 in this category. As far as brand goes, TXN is somewhat of an enigma. Almost, everyone has heard of TXN from the nifty calculators it sold for many years. It is here, they established a brand in consumer electronics. However, they sold this portion of their business pre-1996. Still, I believe companies tend to purchase from names they have heard of and their brand is established. If this alone was not enough to give them a half point, they are also leaders in the digital signal processor (DSP) market. Since they lead the nearest competitor by a factor of nearly 2x, they have qualified according to the Geoffrey Moore as King of the sector.
1/2 point

2. Repeat purchases ------> 0 - 1 point.
This one get TXN a full point. DSPs are in every computer, digital camera, personal digital Assistant (PDA), cell phones, modems, pay phones, pagers, digital TV, set-top boxes, DVD, refrigerators, printers, robotic devices, security alarms, Airbags, anti-lock brakes and I could continue for a long time. DSP's will eventually find itself in just about every electronic device you could possibly imagine. Texas Instruments' TMS320C17 has the honorable distinction of being the first DSP to be placed in a consumer toy. Yes, in 1987, the World's of Wonders "Julie Doll" used this DSP for voice recognition. Unless, you lived on a deserted island in a grass hut, your life has been touched by digital signal processors.
1 point

3. Convenience ------> 0-1
I am not totally sure how this applies, but it seems convenient enough, TXN makes them everyone in the world buys them. Pretty cool to me!
1 point

4. Expanding possibilities-----> 0 - 1
Oh, yes! 1 point here!
Digital signal processors are going into every new technology imaginable, all forms of broadband communication devices will have them. Robotics, DVD, and with all the electronics the major automobile companies are placing in new cars and trucks, this in itself will be a huge repeat business for DSP manufacturers. More and more smart toys are being developed with DSPs inside.
The article below will show you just one of the expanding possibilities for TXN.
http://biz.yahoo.com/prnews/001127/tx_texas_i.html

In less than a year and a half in the cable modem business, Texas Instruments Incorporated has garnered 30 percent of the market for data over cable service interface specification (DOCSIS) chips. TI estimates it will deliver three million of the nearly 10 million total units expected to ship this year, increasing TI's market share by 600 percent from 1999.

According to the article Dataquest estimates 30 million units will be shipped annually by 2004. This represents 300% growth in the next 4 years for this cable modem market. This shows just one avenue of growth TXN will capitalize on in the future.
http://biz.yahoo.com/prnews/001127/tx_texas_i.html


Management: Although this subject was not discussed in other Karm examples I checked, I thought for TXN it was necessary. Thomas J. Engibous, President and Ceo of TXN, saw the importance of selling their low margin DRAM business so they could focus on their DSP business. Selling their DRAM business, in 1998 to Micron technology, Thomas Engibous transformed TXN. Before the sell of their DRAM business, TXN had a PE of 10 and was lucky to be awarded that. After the sell, investors awarded TXN with an expanded PE of around 60+ . With the recent Nasdaq crash the PE ratio is down to 29 , which still represents a nice improvement for TXN over the years when their Dram business hurt their margins and revenues. Texas Instruments management has shown their ability to transform an also-ran into a modern semiconductor powerhouse. I feel their management has proved themselves with this successful transformation of Texas Instruments.

Yahoo's TXN profile and business summary:
http://biz.yahoo.com/p/t/txn.html

Financials:
Sales growth
From the SEC report for their latest quarter.
3,160 million in sales for the quarter ending in Sept. up from
2,515 million in sales for the same quarter a year ago.
Sales growth= 25.6%

Sales growth for the first 9 months fiscal 2000
$8,851 million compared to $7,121 million in the same 9 month period of fiscal 1999.
Sales growth for the 9 month period=24.3%

Sales growth is well above the 10% minimum for a rule maker. Sales growth should continue at this rate since they have shed their low margin DRAM business. This business was also highly cyclical and a drag on earnings when prices were down. 1 point awarded.


Gross margins
Cost of sales for the latest quarter $1,644 million
gross margins = 48%

gross margins for the first 9 months of fiscal 2000 = 48.6%

gross margins for a rule maker should be higher than 50%. Txn falls slightly short of this criteria, one point awarded since it fell in the 40-50% of the KARM criteria

net margins
net margins for latest quarter:
net income for the latest quarter---->$679 million
net margins=21.5%

net income for the 9 month period ------>$2,425 million
net margins for the 9 month period= 27.4%

net margins should be higher than 10% to be a rule maker. TXN more than doubles this criteria, 1 point awarded.

current assets for the latest quarter: -------> $8708 million
current liabilities for the latest quarter------> $2869 million
current ratio = 3.03

debt:

cash and total debt ratio for the latest quarter -----> TXN has 3.76 times more cash than debt.
total cash and near cash -----> $4,555 million
total debt ------>$1,213 million
A rule maker needs to have 1.5 times more cash than debt. Txn doubles this criteria 1
point awarded


Flow Ratio for the latest quarter.

current assets minus total cash = $4,153 million
short term debt = $204 million
Current liabilities for the latest quarter $2,869 million
Current liabilities minus short term debt = $2,665 million
flow ratio=1.6
This number is above the minimum for a rule maker. The minimum for a rule maker is 1.25. No points here

Cash King margin
I will be using the 9 month period in fiscal 2000.
net cash provided by operations --------------> $1509 million
Additions of property,plant and equipment---> (647)
free cash flow= $862 million

Cash King margin = 9.7%
This is slightly below the 10% needed for the rule maker criteria, no points awarded

I am not totally familiar with the point system awarded to the different criteria by the KP board, so I will allow the board to dissect the above numbers. I may have left out some of the Karm criteria too. Those I was aware of, I added. please let me know which ones I left out or what I must add for future KARM reports. Since the deadline is near, I went on and posted this now. Also, it is my belief TXN falls short of a KARM candidate. They could be one in the future if they can continue to execute their DSP strategy. However, they have competition as this recent news article reminds us.
http://www.cnetinvestor.com/yahoonews/newsitem-yahoo.asp?SYMBOL=T040300
The digital signal processor market is huge and growing at healthy double digit rates. The leaders, in this market, will be exceptional investments for many years in the future.

tom
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