Systematic Ideas - Long Texas Instruments (TXN US) & Sage (SGE LN)
New Longs: TXN US, SGE LN, CSCO US, TDC US.
New Shorts:
Closing Positions: ULVR LN, VWS DC, FITB, PM, MDLZ
Flip Book Closes: EFX, CAN LN, IFX GY
Long Texas Instruments (TXN US)
Versus its peers, Texas Instruments (TXN) is cheap on EV/EBIT terms (-16% forward discount to peers & -28% discount to 5y avg. of –4%).
In Q2, TXN witnessed improved margins as well as rising QoQ & YoY revenues. The company generated $4bn FCF against a total asset base of $16bn, delivering an impressive FCF yield of 28.5% of revenues. Management expects a further 100bps margin Q3 expansion aided by its focus on the more profitable auto and industrial segments. TXN is maintaining its steady dividend & buyback policy. Its disciplined capital management focusing on domestic assets and enhancing operational execution has earned 7 straight quarters of analyst price target upgrades.
Relative to the SOX and its Asian peers, not only is TXN operating at a growing margin spread (Fig 1), a quantitative screen of TXN shows that relative momentum (RPC plots) is attractive and the SOX to TXN. Implied vol spread is now in the top quintile (10yr).
Long Sage Group (SGE LN)
With a refreshed management lineup and a new CEO, Sage looks refocused on creating new cloud based products and enhancing existing defensive businesses and strengthening partnerships.
The rollout across more geographies and the move towards subscription based pricing should buttress revenue growth. Sage’s two recent cloud acquisitions in the US should drive new customer growth. The Q3 earnings outlook indicates that the new cloud offerings are already starting to show positive results as cloud revenues seem to have beaten analyst expectations.
Fig 2. shows that Sage is trading at a structural c. 50 P/E point discount to peers. More cyclically, we observe the increase in the Z-score in this spread (arrow). We believe that the company’s
restructuring plan is starting to bear fruit and this extended period of underperformance should now end. So we go long here.
Texas Instruments designs and makes semiconductors that it sells to electronics designers and manufacturers. The company has two reportable segments: Analog and Embedded Processing. The company's analog semiconductors change signals, such as sound, temperature, pressure or images to a stream of digital data. The company's analog segment primary product lines includes: power, signal chain, and high volume. The company's embedded processors are designed to handle specific tasks and can be optimized for various combinations of performance, power and cost, depending on the application. The company's embedded processing segment primary product lines includes: connected microcontrollers and processors.
Deydun Markets
Deydun Markets, founded in 2010 and based in London, is a specialist quantamental research boutique. The client base includes institutional equity investors across the spectrum audience primarily from fundamentally driven long term investors to long / short high turnover hedge funds. Deydun covers all global markets through a macro lens as well as bottom up stock picking with the major overlay being the proprietary quantitative models that we have built over the years. The models are rebalanced to suit clients specific needs including quarterly, semi-annual and up to annual rebalance.
Deydun specialises in providing real-time securities recommendations including providing market timing advice and actionable short-only strategies. They use robust quantitative approaches to help isolate alpha for their clients. The systematic models attempt to be:
Right at the right time
- Avoid drawdowns
- Maximise diversification
The differentiated suite of empirical models that Deydun has developed adapt dynamically to mean reversion and momentum states.
The Deydun service is delivered through notes, “Key Thoughts”, that highlight new stock ideas and track the real-time performance of all the Live Book as well as those in the (unique) Flip Book when they have changed the side of the recommendation. These prove outstanding records of divining alpha in very liquid global equities. The models typically achieve 15% to 35% CAGRs in blind forward and real time proofing over one to two business cycles.
Deydun endeavours to provide each client with independent and relevant ideas and transparently track all their calls. Tier one clients receive a bespoke portfolio service and often share their positions to enhance the impact of the Deydun service.
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