INTC Vs. TXN: Which Chip Stock Is Better Pre-Q4 Earnings?
Zacks Investment Research | Jan 19, 2018 02:29AM ET
As the fourth-quarter earnings season is warming up, the focus is back on the major S&P 500 sectors. Earnings growth is expected to be strong for the technology sector, with total earnings expected to be up 14.1% on the back of an 8.6% increase in revenues. (Read More )
Strong earnings outlook from the tech sector puts the spotlight on one of its best-performing sub-sectors, semiconductors. The semiconductor sector has performed favorably over the last one year, with iShares PHLX Semiconductor (SOXX) rising 6.2%. The leading sector gainers for the period are Broadcom Ltd. (NASDAQ:AVGO) and Micron (NASDAQ:MU) , which have increased 49.5% and 98.3% in the past year, respectively.
Texas Instruments Inc. (NASDAQ:TXN) and Intel Corp. (NASDAQ:INTC) are scheduled to report earnings on Jan 23 and Jan 25, respectively. In this context, comparing these two stocks from the broader .
Price Performance
The broader industry has performed strongly over a year, increasing 52.3% versus the S&P 500’s 23.6% gains. Texas Instruments has outperformed both the broader industry and the S&P 500, increasing 55.7% over the same period. In contrast, Intel has posted an increase of only 20.4%.
EBITDA Margin
The most appropriate profitability ratio to evaluate these two semiconductor giants is EBITDA margin. EBITDA stands for earnings before interest, taxes, depreciation and amortization. EBITDA margin is ideal to compare two companies from the same industry but with different capital structures. Thus, EBITDA margin shows what percentage EBITDA makes up of total revenues. It provides investors with a good idea about both the cash flow and the operating profitability of a company.
For the last year, the broader industry has an EBITDA margin of 42.2%. Coming to the individual EBITDA margin ratios, Intel’s reading of 41.43% is lower than that of Texas Instruments’ 46.47%. Clearly, Texas Instruments stands out in terms of profitability.
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Current Ratio
This metric measures the ability of a company to meet its short-term liabilities. In other words, it is the ratio of the current level of total assets and compares it to that of the current level of liabilities. In the last 12 months, Intel has a current ratio of 1.6, which is lower than the industry average of 1.7 as well as Texas Instrument’s reading of 3.99. It is evident that Texas Instruments is more solvent than Intel.
Valuation
The most appropriate valuation metric for a capital-intensive industry like semiconductor is the Price-to-Book (P/B) ratio. This ratio successfully captures the fluctuation in earnings experienced by the sector. First, it is important to consider where the industry as a whole stands from a valuation perspective. Here, we can see that with a Price-to-Book ratio of 4.56, the broader industry is marginally overvalued compared with the S&P 500, which has a value of 3.95.
Coming to the two chipmakers, Texas Instruments is overvalued relative to the broader industry, while Intel is less pricey than the same. Texas Instruments has a P/B ratio of 10.44, while Intel possesses a P/B ratio of only 2.94. On the valuation count, Intel holds a strong edge over its smaller rival Texas Instruments.
Earnings History, ESP and Estimate Revisions
Considering a more comprehensive earnings history, both Texas Instruments and Intel have delivered positive surprises in all the prior four quarters. However, Intel stands out with an average earnings surprise of 9.8%, which is higher than Texas Instrument’s level of 9.2%.
When considering Earnings ESP , Texas Instruments is better placed with a value of 1.06% while Intel has an ESP value of -0.9%. At the same time, Texas Instruments’ earnings estimate for the current year has increased by 1% over the last 30 days, while that for Intel has remained unchanged.
Conclusion
Our comparative analysis shows that Intelholds an edge over Texas Instruments when considering dividend yield and valuations. However, when considering price performance, current ratio and EBITDA margin, Texas Instruments is clearly a better stock.
Moreover, although Texas Instruments’ earnings performance is marginally lower than that of Intel, it has a strong ESP and witnessed better earnings estimate revisions. What clinches the case for Texas Instruments is the fact that it holds a higher Zacks Rank and better ESP value than Intel.
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