Texas Instruments (TXN)- Cutting Out the Middleman
A rare case where skyrocketing DSIs may not be a bad thing
Texas Instruments (TXN) saw its stock price dinged by about 3% last week the day it reported fourth-quarter earnings. Since then, the share price price has drifted downward and it is currently about 6% below its pre-earnings level. While the company beat consensus estimates by 2 cps, management noted in the call earnings received a 3 cps in one-time benefits which the company did not identify. This implied a 1 cps miss. As far as the mystery benefits, we suspect it could be tax rate, which was 11.4% versus the guidance of 13-14% which is 3 cps by itself. We also note that there have been some recent actuarial gains/losses with its pension plan but we won’t know the impact there until the 10-K comes out.
Investors seem to be most focused on the lower-than-expected guidance. EPS for the first quarter of 2024 is expected to be only $0.96-$1.16 on revenues of $3.45-$3.75 billion vs. 4Q23’s $1.49 and $4.08 billion in revenue. This can be traced mainly to China and some other weak end markets that are still working off excess inventories built up during the 2021-2022 chip shortages as well as rising depreciation from the capital spending push.
However, lost in the discussion is a key item- TXN’s plan to permanently raise its achievable high-cycle margins through shifting to direct distribution. On the surface, this is leading to higher inventory levels which are spooking some investors. Historically, TXN has carried about 145-160 days of inventory, but in recent quarters, TXN has forecast that it wants to maintain an inventory level of as much as 200 days. The following table shows the company’s inventory days for the last 8 quarters:
We can see that with the sales turning down, even with inventory almost flat sequentially, TXN’s DSIs have been climbing 15-25 days per quarter. This no doubt alarms some investors who interpret this as a sign of overbuilding and eventual margin pressure. High inventories are traditionally considered a major red flag by semiconductor investors which is sound logic given the cyclical nature of the business. However, we will explore how rapidly rising inventory is actually part of TXN’s very credible plan to increase its high-cycle margins and boost returns and cash flow.
Let’s get Behind the Numbers: