Story Stocks^®

Texas Instruments (TXN) stayed calculated in Q2, meeting its previous earnings and sales forecasts, which translated to its first quarter of sequential improvements following several periods of deteriorating demand. The analog chip and embedded processor manufacturer also projected Q3 numbers in-line with consensus, representing another quarter of sequential growth. While TXN may not have had enough signals to call a bottom within its two primary end markets, industrial and automotive, which combine for three-quarters of its total revenue, other end markets are picking up the slack. After the company achieved its Q2 targets, investors are confident that TXN can do it again in Q3, capitalizing on gradually rebounding demand.

• The macroeconomic climate does remain asynchronous, reflected by sequential declines across TXN's industrial and automotive markets, which fell by low single and mid-single digits, respectively, in Q2. However, personal electronics snapped back to growth, growing by mid-teens from Q1. Similarly, communications equipment and enterprise systems enjoyed healthy growth, jumping by mid-single digits and around 20%, respectively.
• As a result, TXN expanded its adjusted EPS by $0.07 sequentially to $1.17, landing around the midpoint of its $1.05-1.25 outlook, and grew revs by 4% from Q1 to $3.82 bln, just over the midpoint of its $3.65-3.95 bln prediction.
• Topping these highlights was TXN's Q3 guidance, projecting adjusted EPS of $1.24-1.48 and revs of $3.94-4.26 bln, both firmly representing an improvement over Q2. TXN does not typically provide much color surrounding its quarterly forecasts, so it is unclear to what extent each end market supports TXN's outlook. However, while industrial and automotive demand is recovering, TXN remarked that parts of these sectors are still experiencing declines, making it more likely that these two markets will register another quarter of relative weakness in Q3.
  • Instead, management noted that personal electronics, which typically exhibit favorable dynamics in Q3 as customers begin preparing their end equipment for the holiday season, is mostly where the expected sequential revenue lift stems from. It would also not be surprising to find communications equipment and enterprise systems maintain their strong momentum.
• However, because TXN held back from firmly calling a bottom in its two dominant end markets, today's reaction is somewhat muted. Secular growth drivers are still ahead, especially across the industrial and automotive landscapes, from automation to electrification. Additionally, geopolitical tensions may prompt customers to better diversify their supply chains, moving from Taiwan to the U.S., where all TXN's fabs are located. Still, after shares hit all-time highs last week, having more insight into a firm bottom was likely needed to reenergize the stock.

TXN's Q2 report was solid, and its Q3 guidance was encouraging. Following record highs last week, TXN needed to provide uplifting Q3 guidance. Even though the company delivered on this front, its hesitation to call out bottoms in its two primary end markets leaves something to be desired today. It will be interesting to see if its peers follow suit with their upcoming earnings reports, including STMicroelectronics (STM) tomorrow before the open, Microchip (MCHP) on August 1, and Analog Devices (ADI) next month.