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ARM Holdings plc (ADR) (ARMH), Broadcom Corporation (BRCM), Texas Instruments Incorporated (TXN) & More: Is This Stock Destined for Greatness?

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Investors love stocks that consistently beat the Street without getting ahead of their fundamentals and risking a meltdown. The best stocks offer sustainable market-beating gains, with robust and improving financial metrics that support strong price growth. Does Texas Instruments Incorporated (NASDAQ:TXN) fit the bill? Let’s take a look at what its recent results tell us about its potential for future gains.

What we’re looking for
The graphs you’re about to see tell TI’s story, and we’ll be grading the quality of that story in several ways:

Growth: are profits, margins, and free cash flow all increasing?

Valuation: is share price growing in line with earnings per share?

Opportunities: is return on equity increasing while debt to equity declines?

Dividends: are dividends consistently growing in a sustainable way?

What the numbers tell you
Now, let’s take a look at TI’s key statistics:

TXN Total Return Price Chart

TXN Total Return Price data by YCharts.

Passing Criteria 3-Year* Change Grade
Revenue growth > 30% 23% Fail
Improving profit margin (59.1%) Fail
Free cash flow growth > Net income growth 54.4% vs. 18.9% Pass
Improving EPS 31.3% Pass
Stock growth (+ 15%) < EPS growth 40.4% vs. 31.3% Pass

Source: YCharts.
*Period begins at end of Q4 2009.

TXN Return on Equity Chart

TXN Return on Equity data by YCharts.

Passing Criteria 3-Year* Change Grade
Improving return on equity 0.2% Pass
Declining debt to equity 61.7% (since Q2 2011) Fail
Dividend growth > 25% 75% Pass
Free cash flow payout ratio < 50% 28.1% Pass

Source: YCharts.
*Period begins at end of Q4 2009.

How we got here and where we’re going
Most mature companies struggle to earn passing grades on many of these growth tests, but Texas Instruments Incorporated (NASDAQ:TXN) puts in a solid showing, earning six out of nine possible passing grades. The only real failing in the company’s progress is a deteriorating profit margin. Can TI push that margin higher by the time we examine it next year? Let’s dig a bit deeper into the company’s potential in 2013.

We know one area that won’t offer Texas Instruments Incorporated (NASDAQ:TXN) any potential for growth this year: mobile. That’s because the chipmaker made a high-profile decision to stop developing for the space last year, citing the fact that many large customers were beginning to produce chip designs in-house. According to Foolish tech analyst Evan Niu, that may have been the right choice. Samsung has long developed most of its chips in-house, and other major mobile makers (say that five times fast) either are doing the same, or soon will. Licensing ARM Holdings plc (ADR) (NASDAQ:ARMH)‘ reference designs, tweaking them for efficiency, and outsourcing the fabrication to Taiwan Semiconductor Mfg. Co. Ltd. (ADR) (NYSE:TSM) seems to be the order of the day. Where does that leave TI?

TI seems to be doing all right focusing on what it knows. One thing it’s been good at is developing simple Wi-Fi chips that are ideal for use in the nascent industrial Internet, a project spearheaded by General Electric Company (NYSE:GE) but supported by many other companies under the broader designation “Internet of things.” There may not be quite as many applications for these processors as there are for mobile devices, but Broadcom Corporation (NASDAQ:BRCM) is TI’s only serious competitor in this space, which implies a straighter path to domination — by either party.

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