Bernstein Upgrades Texas Instruments, Says 'Margins Still Look Too Low'

With consensus gross margins expectations for Texas Instruments Incorporated (NASDAQ: TXN) looking really low, juxtaposed with the recent stock pullback, analyst Stacy A. Rasgon of Bernstein believes this offers a buying opportunity.

Rasgon upgraded Texas Instruments' rating from Market-Perform to Outperform and increased the target from $70 to $80 a share.

Low Gross Margin Expectations

Rasgon suggested Wall Street "has made it a habit to under-model the company's" gross margin evolution over the last few years and the "trend is likely to continue."

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The firm further noted that the current consensus takes into account "very little future gross margin expansion with only about a point of upside from current levels through 2018." In the firm's view, these expectations "remain too low."

Bernstein believes the bottom line will benefit from the deprecation roll-off with closer capex matching, improving business mix, cost reductions, and increases to 300mm loadings. The firm thinks long-term gross margins setting at 64 percent, which is 300 bps above current levels, is "not outside the realm of possibility."

Valuation

The firm further noted that the current valuation of ~18x for the next 12 months' free cash flow compares "favorable with other high-quality peers" and continued gross margin upside and free cash flow return "should help multiples to sustain."

At time of writing, Texas Instruments was down 0.64 percent oat $67.50.

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