Texas Instruments Sees Stronger Trade Headwinds

Texas Instruments TXN reported so-so third quarter results but provided investors with an ugly forecast for the fourth quarter where year-over-year revenue declines are accelerating, rather than stabilizing or improving, while customers appear to be even more cautious than a quarter ago due to ongoing U.S.-China trade tensions. Further, TI faced a sharp drop in chip sales into communications infrastructure equipment, which is a notoriously lumpy end market. We will maintain our $106 fair value estimate for wide-moat TI. We still view the firm as a best-in-breed operator (regardless of cycles), but thought valuation appeared a bit frothy heading into the quarter. Even with shares down as much as 10% after hours, we'd still seek a wider margin of safety before investing.

TI's revenue in the September quarter was $3.77 billion, up 3% sequentially but down 11% year-over-year and just below the midpoint of the firm's prior forecast of $3.65 billion-$3.95 billion as discussed in July. Broad-based chip demand was predictably weak due to U.S.-China trade tensions, while sales into communication equipment, which was one of the lone bright spots earlier in the year, were down 35% year-over-year and down 20% sequentially. Industrial and auto chip sales were each down a high single digit percentage year over year. Personal electronic, or PE, chip sales were also down year over year but up a midteens percentage sequentially, consistent with normal seasonal patterns. Gross margin rose 60 basis points sequentially and were down only 90 basis points year over year to 64.9%. EPS was $1.49 and beat Street expectations, but mostly due to a discrete tax benefit.

For the December quarter, TI expects revenue in the range of $3.07 billion-$3.33 billion which, at the midpoint, represents declines of 15% sequentially and 14% year over year. TI's guidance is notably worse than seasonal patterns, as the firm's fourth-quarter sequential decline has averaged 8.5% over the past five years.

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