Needham’s Rajvindra Gill (Track Record & Ratings) has long held an optimistic view of NXP Semiconductors N.V. (NXPI – Research Report). In a Dec 18 report, he bases his ‘Strong Buy’ rating on the stock’s strong earnings and equally growth strong potential.
He notes that NXP, despite a soft current environment, reported excellent Q3 results just six weeks ago. The headline numbers, $2.01 EPS and $2.45 billion in total revenue, substantially beat the expectations – Wall Street had predicted $1.90 EPS with $2.42 billion revenues. Q4 guidance was given as $2.39 billion, in line with the third quarter results and well within the company’s reach. Looking at current performance, well into Q4, Gill sees a company with healthy inventory and stable lead times, able to weather the ongoing uncertainty of US-Chinese trade and tariff issues.
As a bonus for investors, he believes this stock is both oversold and undervalued, making the current share price a true bargain.
In fact, Gill describes NXPI as “one of the cheapest stocks in our coverage universe.”
Laying Out the Bull’s Case
Building from the company’s performance, Gill reiterates his $110 price target on the stock. NXPI trades for $70 per share now, so his target gives it a 56% upside. It’s quite the upbeat prediction for a stock that has lost almost 18% this month, but Gill bases his optimism on a set of four inter-related factors:
1. Auto
He sees growth potential in NXP’s automotive segment. Providing chips for carmakers accounts for 49% of NXP’s overall sales, and the company predicts growth of 7% to 10% by 2021. Looking at this segment, Gill says NXPI’s automotive business has performed relatively well. “It had a strong growth rate in analog and radar solutions, with content gains continuing to increase in radar, battery management, Microcontrollers, Ethernet, and V2X.” The bullish conclusion: NXPI is well-positioned in several of secular trends in automotive.
2. Internet of Things
Gill is also excited about NXP’s Internet of Things (IoT) segment. IoT makes up 21% of the company’s sales and should soar 8% and 11% over the next three years. “The biggest growth drivers for Industrial & IoT are expected to come from general-purpose processing, which includes 32-bit microcontrollers & cross-overs, IoT application processors, and analog mixed-signal & connectivity” writes the analyst.
3. Boosting share prices
Luckily for shareholders, Gill notes NXP’s ongoing policy of boosting share prices. He points out that the company bought back 49 million shares in Q3, reducing the shares outstanding by 15%, to 296 million. The buybacks, along with a $1 billion bridge loan on the books, increased the company’s leverage to 1.39x; however, NXP’s net-leverage target is 2.0x. As Gill says, this “gives it flexibility to take on more debt to fund additional buybacks.”
4. Gross margin
Finally, NXP is on track for improvements in the gross margin. In Gill’s words, “Although the firm expects its gross margin to stay flat in 4Q, its goal is to achieve a 55% gross margin exiting 2019. NXP believes that improvements in product mix, pricing, yield, and cost efficiency will offset potentially flattish revenue. We believe the firm will be successful in improving its gross margin in the following quarters.”
Tying it All Together
In his current report on NXPI stock, Gill put his bottom line thus: “We believe NXPI is well-positioned to benefit from secular tailwinds in automotive, experience strong growth in Industrial & IoT, improve its gross margins, and continue enhancing shareholder value.”
Those Bulls Keep Running
NXP has also been reviewed by John Pitzer (Track Record & Ratings) of Credit Suisse and Harsh Kumar (Track Record & Ratings) of Piper Jaffray. Pitzer, like Gill a five-star analyst, gives the stock a strong upside and price target, 77% to $125. Kumar, a three-star analyst, just initiated coverage of this stock on Dec 20. His stating price target is $100, in line with the average and suggesting an upside of 41%.
A Word of Caution
Writing for Stifel on Dec 3, market analyst Tore Svanberg (Track Record & Ratings) injects a bearish note into the discussion. He rates NXPI as ‘sell,’ and in his comments he points out that since the termination of the Qualcomm (QCOM) deal, “circumstances have changed materially” for NXP. He also notes that the increased debt – for both companies – does not preclude a future attempt by Qualcomm to try the acquisition again.
The Analyst Consensus
Including the ratings in this article, NXPI has 9 ‘buys,’ 5 ‘holds,’ and 1 ‘sell,’ giving an analyst consensus of ‘Moderate Buy.’ The average price target is $99, for a potential upside of 40%.
View NXPI Price Target & Analyst Ratings Detail
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