Texas Instruments (NASDAQ: TXN) Breaking Out Ahead Of Earnings

Texas Instruments Fundamental Cog In Tech Infrastructure

Tech is one of the sweetest stories coming out of the COVID-19 pandemic and one that is going to play out over the next decade. The world was already undergoing a slow, steady to shift to the digitization and that shift accelerated in the wake of COVID. Why? Because technology works. The ability to stay home and do … everything is beyond valuable to a social-distancer. From work to play to shopping and chores if it needs to be done you can do it with technology.

When it comes to technology it’s hard to pin down exactly which companies will do best which is why I like to focus on the infrastructure of tech. The companies that make tech work, the companies that make the connectors and routers and sensors and processors will always be in demand regardless of which phone or laptop is in vogue at the time.

That’s where Texas Instruments (NASDAQ: TXN) comes in. Texas Instruments is one of the oldest tech-infrastructure companies on the planet. In business for 90 years, this company has established itself as a blue-chip winner in the tech world and one whose products are used by every industry on the planet.

Texas Instruments - What The Analysts Are Expecting

The analysts are expecting revenue and earnings to fall in the 2nd quarter of 2020 and for the full-year. Regarding the 2nd quarter, the consensus of $0.92 for EPS and $2.95 billion for revenue represents a decline of -21% and -12.5% from the previous year. As it stands, the consensus puts the company on track to firmly beat the full-year estimate with the added bonus that the 2nd quarter consensus is too low.

Texas Instruments tends to beat consensus targets 90% to 100% of the time which means two things. The first is that the stock could pop after earnings are released, especially if the results beat consensus by a larger margin than anticipated. Regardless of beating consensus, matching estimates puts the company on track to beat the full-year consensus so upward revisions are in store. If there is anything that can get a stock moving it’s a round of upward revisions supported by a brightening outlook for earnings.

Regarding the outlook for next year, Texas Instruments is expected to see revenue and earnings growth resume. That said, the two-year outlook is a bit negative (from pre-COVID to post-COVID) but the impacts of increased digitization and 5G have not yet been fully factored in. In that light, there is an additional tailwind brewing for Texas Instruments that will support business acceleration over the next 3 to 5 years.

Texas Instruments - Healthy Dividend And Fortress Balance Sheet To Support Prices

In addition to its blue-chip status and positioning as a fundamental player in the tech-infrastructure industry, Texas Instruments is a high-quality dividend payer. The company tends to carry a higher-than-what-I-like payout ratio but there are mitigating factors. For one, the company’s cash-flow and free-cash-more than cover the payout and the balance sheet is a fortress. The company’s cash position (high), debt (low), and coverage ratios (very, very high) are the stuff of legend and point to distribution safety and regular annual increases.

The company just declared its next quarterly dividend, payable August 17th, so we know that payout is safe. Based on the history we can expect the company’s next distribution increase will come next quarter and it could be a big one. The 5-year CAGR is running above 20% which equates to $0.75 or about 50 basis points with the stock trading near $137.

Texas Instruments Technical Outlook: Bullish and Breaking Out

Texas Instruments began its move days before the earnings release was due and now breaking out to new highs. The company is up about 10% in that time and likely to head higher assuming Q2 results are as I expect. In that scenario, the stock could easily move up about 10% in the near-term with as much as 20% to 30% upside by the end of the year.