Here is a look at how Texas Instruments (TXN) fares in ModernGraham's opinion, based on an updated and modernized version of Benjamin Graham's requirements of defensive and enterprising investors from The Intelligent Investor:
Defensive and Enterprising Investor Tests (What is the significance of these tests, and what is PEmg ratio?) :
Defensive Investor - must pass at least 6 of the following 7 tests: Score = 4/7
- Adequate Size of Enterprise - market capitalization of at least $2 billion - PASS
- Sufficiently Strong Financial Condition - current ratio greater than 2 - PASS
- Earnings Stability - positive earnings per share for at least 10 straight years - PASS
- Dividend Record - has paid a dividend for at least 10 straight years - PASS
- Earnings Growth - earnings per share has increased by at least 1/3 over the last 10 years using 3 year averages at beginning and end of period - FAIL
- Moderate PEmg ratio - PEmg is less than 20 - FAIL
- Moderate Price to Assets - PB ratio is less than 2.5 or PB x PEmg is less than 50 - FAIL
Enterprising Investor - must pass at least 4 of the following 5 tests or be suitable for a defensive investor: Score = 5/5
- Sufficiently Strong Financial Condition, Part 1 - current ratio greater than 1.5 - PASS
- Sufficiently Strong Financial Condition, Part 2 - Debt to Net Current Assets ratio less than 1.1 - PASS
- Earnings Stability - positive earnings per share for at least 5 years - PASS
- Dividend Record - currently pays a dividend - PASS
- Earnings growth - EPSmg greater than 5 years ago - PASS
Valuation Summary (Explanation of the ModernGraham Valuation Model)
Key Data:
| MG Value | $31 |
| MG Opinion | Overvalued |
| Value Based on 3% Growth | $27 |
| Value Based on 0% Growth | $16 |
| Market Implied Growth Rate | 7.23% |
| Net Current Asset Value (NCAV) | -$0.08 |
| PEmg | 22.96 |
| Current Ratio | 2.98 |
| PB Ratio | 4.23 |
Balance Sheet - 9/30/2013
| Current Assets | $8,101,000,000 |
| Current Liabilities | $2,723,000,000 |
| Total Debt | $4,161,000,000 |
| Total Assets | $19,244,000,000 |
| Intangible Assets | $6,806,000,000 |
| Total Liabilities | $8,193,000,000 |
| Outstanding Shares | 1,094,560,000 |
Earnings Per Share - Diluted
| 2013 (estimate) | $1.91 |
| 2012 | $1.53 |
| 2011 | $1.91 |
| 2010 | $2.66 |
| 2009 | $1.15 |
| 2008 | $1.45 |
| 2007 | $1.83 |
| 2006 | $1.69 |
| 2005 | $1.39 |
| 2004 | $1.05 |
| 2003 | $0.68 |
| 2002 | -$0.27 |
Earnings Per Share - Modern Graham
| 2013 (estimate) | $1.86 |
| 2012 | $1.80 |
| 2011 | $1.89 |
| 2010 | $1.84 |
| 2009 | $1.45 |
| 2008 | $1.56 |
Conclusion:
Texas Instruments Incorporated is not suitable for the Defensive Investor after failing to adequately grow its earnings and trading at high PEmg and PB ratios. However, the company may be suitable for the Enterprising Investor who is willing to take on more risk than his Defensive Investor counterpart. The company passes all of the requirements for the Enterprising Investor, and further research is therefore warranted. From a valuation perspective, Texas Instruments has grown its EPSmg (normalized earnings) from $1.56 in 2008 to an estimated $1.86 for 2013. This level of growth that has been achieved historically is not as high as the market's implied estimate of over 7%. As a result, the company appears to be overvalued at the present time. Enterprising Investors should keep the company on a watch list in the hopes that earnings turn out to be higher than expected, thus raising the valuation, or the price lowers to a more intriguing level.
Disclaimer: The author did not hold a position in Texas Instruments Incorporated at the time of publication and had no intention of entering into a position within the next 72 hours.
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