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Terry Smith added 60.2% to his Texas Instruments position last quarter. It was his second biggest investment in that quarter after Zoetis Incorporated. So today we are going to go through our sevenstep analysis process to find out why. What does he see in the semiconductor giant and is it really such a great opportunity despite the concerns about rising debt?
And before we dive in, I want to thank Forecaster for sponsoring today's video and we will be using their website throughout this analysis. Texas Instruments Incorporated is a technology company that specializes in designing and making semiconductors. The company plays a significant role in various industries.
They produce parts for smartphones, computers, and cars, making it a very important player in today's technologydriven world. So, let's take a closer look at Texas Instruments. If you invested $1,000 in this company 10 years ago, you bought 19 shares and today they would be worth something close to $3,439.
And this company also pays dividends. So in that time you would get $634 as dividends. So, if we add together the current value of shares and the dividends, we get $4,072. And that is a gain of 307% in 10 years. That's a very solid result, especially considering the quality and stability of this business.
So, let's see who benefited from this growth. individual insiders that is NX 0.2% of the company is owned by individual insiders. So unfortunately the management doesn't have much skin in the game and are individual insiders buying that is an X. Unfortunately, insiders are mainly selling recently and the super investors own this company.
That is a check with eight super investors including Terry Smith, Christopher Davis, and David Katz. And are they buying right now? That is a check. Super investors bought 1,150,000 shares last quarter and sold 670,000 shares. So they are net buyers which is encouraging. And the main buyer is of course Terry Smith.
So let's try to understand why Smart Money is still accumulating shares of this semiconductor company. return on invested capital that is a track at 30.2% and we want to see this number higher than 10%. So that shows excellent capital allocation by the management. And let's take a look at net profit margin.
It is a check averaging 38.5% over 5 years and the industry average is 19.9%. So, Texas Instruments is absolutely crushing its competition when it comes to profitability. And now, let's see share buyback. It is yet another check. In the last 10 years, they bought back 15.2% of shares. So, long-term investors own a bigger portion of the company without investing any extra cash.
And the debt, it is an X. it would take them almost 9 years to pay the long-term debt with a current free cash flow and we want to see it under two years. So, this is definitely a red flag and something we need to keep in mind. Actually, let's go to forecaster website and let's look at the balance sheet of Texas Instruments.
So let's go to row data and balance sheet and we see that the cash is pretty stable in the last five years. Shortterm debt is going up in the last 3 years. So that is disappointing. And long-term debt is going up every year from 3.5 billion in 2017 to over 12.8 billion. That is very bad. And the last line here is always net debt.
And we can see it is a serious problem. But apart from the debt, the financial health looks really nice. Revenue growth that is an X at 1.8% 10-year compound annual growth rate. And we would like to see this number higher than 10%. So that's really disappointing. Free cash flow growth that is an X at minus 8.6% in the last 10 years.
So very very bad. And earnings per share growth that is an X at 7.3% in the last 10 years. And this result is helped by a massive share buyback program over the last decade. So the growth story for Texas instruments is quite challenging to say the least. But we have to remember that semiconductors can be very cyclical and these numbers might not tell the whole story.
If we go to forecaster and look at the income statement, we see that all the numbers revenue, cost of revenue, gross profit, operating expenses are going up and down through the years. So this cyclicality is something to keep in mind. And now let's see what shareholders can expect in terms of dividends.
The dividend yield is 2.9%. So shareholders can get $544 annually per every share. That's a decent yield. And the payout ratio that is an X at1%. So they are paying out more than they earn which is a bit concerning and not sustainable in a long term. And what about dividend growth? It is a check at 9.2% 5-year growth rate.
So despite a high payout ratio, they've been consistently growing the dividend. I have to say that even though I really like dividends because they lower an investment risk and can be reinvested and all of that, I have to say I don't like this dividend. It seems that the company wants to become a dividend aristocrat.
They are growing their dividend for 19 years straight. But at what cost? They are borrowing money like crazy so they can grow and invest in the business and they are spending all their earnings on dividends. That's not what I like to see. Okay, let's value Texas instruments. price to earnings ratio is 34.8.
That's quite high. But there is an interesting reason for it. Let's go to forecaster and let's look at the overview of this company. And on this graph, we see the price history. And if we click here, we see the PE ratio history as well. So we are near the highest PE ratio in the history of this company.
But the price since 2021 didn't change that much. So the high PE is caused by lower sales and effectively lower net income. And when it comes to cyclical companies, PE can be very misleading sometimes. So let's value this company using a discounted cash flow analysis. And because it is a cyclical company, we will use a five-year average free cash flow to hopefully get a more realistic intrinsic value.
First, we have to estimate the growth of Texas instruments. So in the low scenario we will estimate a growth of 7% for the first five years and then 5% in the medium 10% and then 9% and in the high scenario 15% and then 13% growth. So the low scenario is close to the earnings per share growth in the last decade.
medium is showing a story in which Texas Instruments would grow faster than it did in the last 10 years and the high one is close to the predicted growth of the industry which is around 15.4%. So with such estimates the intrinsic value in the low scenario is $66, in the medium $87 and in the high scenario $126.
Now, we must always apply a margin of safety to those prices. Personally, I use a 30% margin of safety, but you can use any margin that fits your risk tolerance. And with such a margin, we get in the low scenario $46, in the medium $61, and in the high one $88. And the current price is around $184. So it is all in the red.
Texas Instruments looks really expensive at the moment. So there are a number of things to like about this company. It has exceptional profit margins and solid returns on invested capital. It's also benefiting from major government support, having secured $1.6 6 billion in funding under the US Chips and Science Act to support over $18 billion in investments for constructing three new semiconductor factories.
And when we look at our stock ranking pro, which you can get access to by becoming a Patreon, and filter it to only show the semiconductor industry, we see Texas Instruments has the best return on invested capital of all those companies and the best net profit margin. But there are also concerning aspects.
The growth has been disappointing across all metrics. The valuation is not very appealing at current levels. But what really worries me is the debt situation. In our stock ranking, we see that it has the second biggest debt of all the semiconductor companies we analyzed on this channel. And this debt is going up all the time.
That is a red flag for me. I want companies in my portfolio to have a Ford Knox balance sheet so they can withstand any crisis. And this company does not look like that. But if we go to forecaster AI agent and choose recent developments, we can read that as of June 20125, Texas Instruments is progressing through a significant period of investment known as a capital expenditure cycle which means that the company is investing heavily in its operations to boost its future profitability.
So if you are okay with high leverage then this strategy may be very profitable in the long run. And if you would like to check out Forecaster for yourself then you can use my affiliate link in the description and you will get a free trial and also a 10% discount if at the checkout you will use a code bold 10.
So thank you Forecaster for sponsoring this video. And while Texas Instruments reported strong Q1 2025 earnings, management acknowledged potential risks from tariffs and geopolitical tensions. Also, JP Morgan analysts warned that ongoing trade conflicts could impact the company's earnings in the later half of 2025.
It seems clear that Terry Smith believes in the long-term fundamentals of this business despite the current challenges. The company's dominant position in analog semiconductors and its massive infrastructure investments could pay off handsomely in the future. But at current prices and with a meaningful debt, for me at least, it is a stock to watch rather than buy right now.
If you found this video interesting, then definitely check out my analysis of Skyworks, which is another semiconductor company. Thank you for watching and see you in the next
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