Texas Instruments' Transformation in Full Swing
The firm's move to become a highly profitable analog and embedded chipmaker is well under way.
Texas Instruments (TXN) hosted its annual call with investors this week to update its strategy regarding capital management. TI's revised financial goals were within the range of our prior expectations and appear quite achievable, and we are maintaining our wide moat rating and $52 fair value estimate. We remain fond of management's clear focus on free cash flow generation and consider this investor update to be one of the many reasons TI's managers are exemplary stewards of shareholder capital.
We were pleased to get a better understanding of the firm's transition to 300-millimeter wafer manufacturing capacity. By shifting to 300mm wafer production (and especially by doing so with used manufacturing equipment), TI expects a 40% reduction in chip manufacturing costs. After factoring in all other assembly and test costs associated with analog production, TI demonstrated that a $1 chip that earned 60% gross margins on a 200mm wafer can now be built at a 68% gross margin on a 300mm wafer. We've anticipated gross margin expansion for quite some time as the firm focuses on 300mm analog production, but the disclosure that TI can fulfill another $8 billion of orders with its factories today shows that its margin expansion could have a long runway and our margin assumptions could be conservative. More important, TI doesn't plan on using this cost advantage to wage a price war, which is usually a losing strategy in analog as chip performance matters more than price, but will instead let these savings fall to the bottom line. Furthermore, TI provided a clear goal that it can expand free cash flow margin to 30% of revenue on a sustainable basis during "good" market conditions, versus 27% earned in 2014, an improvement from its prior target of 20%-30% free cash flow margins, depending on industry cycles.
Brian Colello does not own shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.