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Texas Instruments’ 2Q16 Results Renew Investor Optimism

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Texas Instruments’ stock climbs on better-than-estimated guidance

This earnings season is showing signs of strength for many companies, especially analog IC (integrated circuit) makers. Recent news of Linear Technology’s (LLTC) acquisition by Analog Devices (ADI) sent almost all analog IC makers’ stocks up. Another round of optimism was seen in the analog IC market, when Texas Instruments (TXN) reported better-than-estimated earnings and guidance.

On July 26, 2016, one day after the earnings announcement, Texas Instruments’ stock rose by 9.8% to a 16-year high of $72.58. This was the company’s biggest intraday gain in nine months.

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Renewed optimism among analog investors

On the same day, the ADI-LLTC deal was announced, which saw Linear Technology’s stock rise by 29% to a 15-year high of $62.49. This was followed by an upward revision in ADI’s guidance for fiscal 3Q16, which saw the company’s stock rise by 3.9% to $62.87.

Such renewed optimism sent stocks of other analog IC manufacturers up by more than 5%. Maxim Integrated Products’ (MXIM) stock rose by 5.4%, Microchip Technology’s (MCHP) stock rose by 5.7%, and ON Semiconductor’s (ON) stocks rose by 5.9%.

Credit Suisse analyst John Pitzer said, “Texas Instruments should be viewed as a positive barometer for the industry…emblematic of the early stages of an upturn despite continued investor concerns related to the macro.”

Overview of Texas Instruments’ fiscal 2Q16 earnings

The first signs of a slowdown in smartphone sales alarmed Texas Instruments, and it started diversifying across multiple end-markets by building a broad product portfolio. It shifted focus toward higher-margin analog and embedded chips used in automotive, communications, and industrial. While these efforts did not have a significant impact on the company’s revenue, margins and cash flows improved.

Notably, Apple (AAPL) continues to account for over 10% of Texas Instruments’ revenue, but slowing iPhone sales did not impact the chipmaker’s margins. Texas Instruments has reported strong guidance for fiscal 3Q16 as it prepares for Apple’s upcoming flagship product iPhone 7.

In this series, we’ll look at the performance of Texas Instruments in fiscal 2Q16 and the factors that will drive earnings in fiscal 3Q16 and beyond.

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