Financial Valuation & Stock Recommendation Case Project

1. 1
Stock Valuation
Huilian (Irene) Zhang & Nathan Vandergrift

2. 2
Agenda and Summary Findings
Industry Overview
Company Overview
Valuation
• Product Description
• Competitors
• Outlook and Growth
• Background
• Historical Performance
• Positioning and Outlook
• Multiples
• Discounted Cash Flow Model
• Sensitivity
Recommendation
• Key Factors
• Buy / Sell / Hold

3. 3
Agenda and Summary Findings
Industry Overview
Company Overview
Valuation
• Product Description
• Competitors
• Outlook and Growth
• Background
• Historical Performance
• Positioning and Outlook
• Multiples
• Discounted Cash Flow Model
• Sensitivity
Recommendation
• Key Factors
• Buy / Sell / Hold

4. 4
We, recommend to HOLD Texas Instrument’s stock
Current Stock Price: $45.61
Our Estimated Price: $43.18
Estimated Stock Price Range: $32 - $54
Upsides / Strengths Downsides / Weaknesses
• Global Semiconductor market is
expected to grow 5.8% over the
next five years1
• Strong position in the current
market and R&D strength are
expected to help increase market
share
• Relatively conservative
assumptions for the valuation
• Revenue stagnation over the past
few years following economic
downturn and elimination of
wireless connectivity businesses
• R&D investment risk (~$1.5B in
2013)
• Potential for increased price
pressure through consolidation
Source: IBISWorld Industry Report C2524-GL Global Semiconductor & Electronic Parts

5. 5
Agenda and Summary Findings
Industry Overview
Company Overview
Valuation
• Product Description
• Competitors
• Outlook and Growth
• Background
• Historical Performance
• Positioning and Outlook
• Multiples
• Discounted Cash Flow Model
• Sensitivity
Recommendation
• Key Factors
• Buy / Sell / Hold

6. 6
Semiconductors represent a broad category of components
and are widely used in a variety of electronic devices
What is a semiconductor?
• Can either conduct or not conduct
electrical current
• Device that controls the flow of
electrical signals
• Integral for modern electronic
devices
What are potential types?
• Microprocessor
• Microcontroller
• Memory Chips (ex. RAM)
• Voltage and Current Management
• Amplifiers and Comparators
• Diodes and Rectifiers
What end products use
semiconductors?
• Phones / Tablets
• Computers / Printers
• Automobiles
• Medical devices
• Televisions
How are they made?
• Wafer production (silicon crystal)
• Formation of integrated circuit
– Over 100 steps completed in a
“clean room”
– Deposition, Masking, Etching,
Doping
• Production time at least 6-8 weeks

7. 7
Texas Instruments is among the major semiconductor
companies but generally competes with smaller players
Largest Global Semiconductor Companies Texas Instruments Closer Competitors
Figures in
$MM
Market
Cap
2013
Sales
Gross
Margin
Intel 130,723 52,708 59.8%
Samsung 171,976 216,626 39.8%
Qualcomm 136,228 25,712 59.5%
Micron
Technology
23,237 13,310 29.7%
SK Hynix 25,600 13,417 37.1%
Texas
Instruments
50,675 12,200 52.1%
Figures in
$MM
Market
Cap
2013
Sales
Gross
Margin
ST Micro-electronics
8,749 7,898 32.7%
Infineon 13,122 5,661 37.0%
Freescale 6,619 4,332 43.7%
Analog
Devices
16,085 2,639 64.8%
Microchip
Technology
9,337 1,931 58.5%
Atmel 3,338 1,394 42.3%
Note: Intel is also a close competitor
Source: CapitalIQ

8. 8
Market for semi-conductors is highly competitive but scale
and technological advances create room for differentiation
Suppliers
(+) More than 100
(+) Provide a commoditized
product
Competitive Rivalry
(-) Numerous large + medium
sized companies
MEDIUM THREAT HIGH THREAT MEDIUM THREAT
(-) Short-lived product life-cycles
Substitutes
(-) Rapid imitation is possible
(+) Intellectual property rights
(+) Some tech is inimitable over
short-medium term
New Entrants
(+) Industry has matured
(-) Ability to be “foundry-less”
Customers
(-) A few “giants” (Apple,
Samsung, etc.)
(+) Vast number of total cust.
across all electronics categories
LOW THREAT
MEDIUM THREAT

9. 9
Worldwide sales of semiconductors eclipsed $300BN in 2013
but growth has tempered over the last three years
$350
$300
$250
$200
$150
$100
$50
$-
Worldwide Semiconductor Sales ($BN)
15 YR CAGR: 6.1%
3 YR CAGR: 1.1%
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
Source: Semiconductor industry association
Future Growth
Expectations:
2014: 13.4%
(Future Horizons)
3 Year CAGR: 7.4%
(PWC)
5 Year CAGR: 5.8%
(IBIS World)

10. 10
Agenda and Summary Findings
Industry Overview
Company Overview
Valuation
• Product Description
• Competitors
• Outlook and Growth
• Background
• Historical Performance
• Positioning and Outlook
• Multiples
• Discounted Cash Flow Model
• Sensitivity
Recommendation
• Key Factors
• Buy / Sell / Hold

11. 11
Texas Instruments has a technologically rich history but the
firm’s strategy as morphed over time
• Founded in 1951 as a reorganization of Geophysical Service
– Seismic equipment for petroleum exploration
– Defense electronics for the U.S. military
• Throughout its history TI has created several “firsts”
– Transistor radio
– Integrated circuit
– Silicon transistors
– Hand-held calculator
– Laser guided system (for weapons)
• The company has also divested from several businesses
– Geophysical services
– Defense
– Computers & Software and Industrial Controls
– Sensors & Controls

12. 12
Today, Texas Instruments focuses nearly all of their resources
on analog and embedded semiconductors
Revenues by Segment
$13.7B $12.8B $12.2B
Analog Market $40BN
TI Share 18%
Embedded Market $17BN
TI Share 14%
• Analog semiconductors
– Transform real-world signals such
as sound, temp., pressure, or
images to a stream of digital data
– Many end markets including
personal and industrial
electronics
– Account for a growing majority
of the firm’s revenue
• Embedded semiconductors
– “Brains” of many electronic
devices
– Many end markets including
automotive and industrial
– Represent a growing portion of
the firm’s revenue
36%
28% 21%
17%
18%
20%
46%
55% 59%
2011 2012 2013
Analog
Embedded
Other
*Other includes calculators, legacy wireless products, and other
smaller product lines

13. 13
Texas Instruments’ success is reliant upon growth within
major segments as well as health within the overall industry
Strengths Weaknesses
• Robust and effective research and
development capabilities
• Diversified operations and
significant production capacity
• Leading analog semiconductor
market position
• Geographic concentration of
revenues (Asia)
• Operational inefficiency especially
within embedded semiconductors
• Lagging legacy business (wireless
connectivity)
• Fluctuations in product demand
for electronic devices
• Technological advancements that
make key products obsolete
• Growth prospects in automotive,
networking, and industrial
• Further strategic acquisitions
• New products and increased
market share in embedded
semiconductors
Opportunities Threats

14. 14
Texas Instruments has significantly outperformed the S&P
500 over the last 25 years but with much greater volatility
$4,000 Cumulative Wealth of $100 Invested in 1989
$3,500
$3,000
$2,500
$2,000
$1,500
$1,000
$500
$-
Texas Instruments
S&P 500
10 YR CAGR 5 YR CAGR 3 YR CAGR 1 YR
Texas Instruments 6.4% 26.7% 14.3% 39.8%
S&P 500 7.4% 20.9% 14.7% 23.3%

15. 15
Unlevered cash flows have grown moderately over the past 5
years with some improvement in gross margin
$1,871
Unlevered Free Cash Flows and Gross Margin
$2,743
$2,484
$2,954
$3,054
47.9%
53.6%
49.3% 49.7% 52.1%
FY 2009 FY 2010 FY 2011 FY 2012 FY 2013

16. 16
Texas Instruments performs well on ROIC compared to
competitors but has room to improve sales and gross margin
20% YOY Sales Growth
14%
6%
15%
10%
5%
0%
-5%
-1% -2% -3% -10% -3% -5% -5%
80% Gross Margin
65% 60% 59%
52%
44% 42% 37% 33%
60%
40%
20%
0%
25% ROIC
19%
12% 11% 11% 9%
6% 5%
NM
20%
15%
10%
5%
0%
30% R&D as % of Sales
23%
20% 19% 18% 17% 16%
12% 11%
25%
20%
15%
10%
5%
0%
Source: CapitalIQ

17. 17
Agenda and Summary Findings
Industry Overview
Company Overview
Valuation
• Product Description
• Competitors
• Outlook and Growth
• Background
• Historical Performance
• Positioning and Outlook
• Multiples
• Discounted Cash Flow Model
• Sensitivity
Recommendation
• Key Factors
• Buy / Sell / Hold

18. 18
Comparable P/E multiples suggest TI is slightly overvalued
while EV/EBIT multiples suggest under to fairly valued
Current market price: $45.61
Price-to-Earnings
Enterprise Value / EBIT
$/share 0 10 20 30 40 50 60 70 80 90 100
Comparable Price-to-Earnings
High: 23.28
Low: 14.25
Average: 19.90
Texas Instruments: 21.49
Average: $38.6
Average: $48.9
Comparable Enterprise Value / EBIT
High: 19.32
Low: 15.21
Average: 17.33
Texas Instruments: 15.61

19. 19
A discounted cash flow model provides a fundamental
analysis of the cash flows to value Texas Instruments
Assumptions for the DCF Valuation Model
Operating
Assumptions
Cash Flow
Assumptions
Discounting
Assumptions
• Expected Sales growth between 5%-6.2% in the next 5 years, and 4% thereafter
• COGS is expected to be lower (as % of Sales) in the next 5 years and then remain stable
• SG&A and R&D as well as other operating expense were stable for the past years, and the trend
maintaining for the upcoming years (flat)
• Working Capital and Depreciation & Amortization have the highest impacts on Cash Flow
• Low volatility in the Cash Flow adjustments (as % of sales) in the past 5 years
• All the Cash Flow adjustments were done using the past 3 year average historical data (as % of
Sales)
• Beta = 1.26, Risk Free Rate = 4%, Market Premium = 6.5%
• 12.19% for the cost of equity, 3.0% for cost of debt
• Debt / EV= 10.55%
• WACC of 11.2%

20. 20
Valuation using DCF model presents a calculated stock price
of $43.18, relatively close to the current market price
Current Price (May 14, 2014): $45.61
Implied Perpetual Growth Rate: 5.11%
5.3% higher than our calculated price
Relatively fair valued

21. 21
Sensitivity analysis between cost of capital and long-term
growth rate also shows TI’s price is relatively fair valued

22. 22
We, recommend to HOLD Texas Instrument’s stock
Current Stock Price: $45.61
Our Estimated Price: $43.18
Estimated Stock Price Range: $32 - $54
Upsides / Strengths Downsides / Weaknesses
• Global Semiconductor market is
expected to grow 5.8% over the
next five years1
• Strong position in the current
market and R&D strength are
expected to help increase market
share
• Relatively conservative
assumptions for the valuation
• Revenue stagnation over the past
few years following economic
downturn and elimination of
wireless connectivity businesses
• R&D investment risk (~$1.5B in
2013)
• Potential for increased price
pressure through consolidation
Source: IBISWorld Industry Report C2524-GL Global Semiconductor & Electronic Parts