NXP Semi: Too Cheap To Ignore

| About: NXP Semiconductors (NXPI)

Summary

NXP Semi has already given up the rally from the solid Q4 results.

The company expects the merger benefits from Freescale to kick in over the next few years providing substantial benefits.

The stock is too cheap to ignore, though NXP Semi likely trades lower over the next month.

After the market carnage on Monday, NXP Semi (NASDAQ:NXPI) sits at multi-year lows following the integration of Freescale Semi back in December. The merger was supposed to provide huge value, but the stock now trades at a lower level than prior to the merger.

Despite the weakness in semiconductor demand, the merger provides significant synergy benefits. The market has already sold the stock off $50 due to disappointing results and weakness in key markets. Are the synergy benefits enough to buy into this dip?

Synergies Kicking In

First and foremost, the Q4 results and Q1 guidance should remind anybody of the pitfalls of chasing a merger higher. The combination of a month of Freescale revenues along with the disposal of the RF business make the financials near impossible to analyze. The end result is a need to focus on the numbers going forward.

At the time of the merger, analysts were forecasting pro-forma earnings targets of up to $8 for 2016 and $11 by 2018. Of course, these numbers factor in the full synergies of $500 million that won't be fully achieved this year. For now, the inventory buildup in key distributors and the slowdown in premium smartphone sales interrupted those expectations for 2016. Investors though need to keep those original targets in mind going forward.

Without any market growth or market share gains by NXP, the company is set to drastically grow earnings over the next few years. The ability to realize massive synergies and pay down debt automatically adds to earnings. The synergies alone will add roughly $1.50 per share while the interest costs run another $1.00 per share.

The combination is good for $2.50 in increased earnings power. The company may even choose to use stock buybacks to further increase EPS considering the debt as an average cost below 4%. The company bought 1.8 million shares during Q4 at a significantly higher price.

Conservative Guidance

The original value creation of the merger was the synergies and the ability to fund the deal with low cost debt. The company was going to increase the NXP EPS from the 2016 target back in March of $6.54 to somewhere around $7.20 by my original simple calculation.

The new entity guided towards an EPS of $1.10 at the midpoint for Q1. The number was roughly around analyst estimates, but led to a reduction in full-year estimates to only $5.66. Based on the completion of the Freescale merger, analysts had increased the 2016 EPS forecast from $5.19 to $5.81 for the year.

The market appears to have already forgotten that NXP beat Q4 estimates by an incredible $0.18. In addition, the company has a history of beating earnings by a sizable amount.

The numbers suggest NXP provided very conservative guidance for Q1 and was extremely mum on synergies during the earnings call in order to set up an easy beat for the year.

The 2017 estimates appear to only establish synergy gains and benefits from lower debt or stock buybacks. Analysts aren't apparently factoring in any rebound from end markets or the ending of the current inventory correction.

The original forecast of up to a $9.50 EPS in 2017 assuming the $500 million in synergies were achieved makes the current estimates of $7.38 too conservative.

Takeaway

The crazy part of the NXP Semi story is that the stock now trades at 8.7x what appears like conservative 2017 EPS estimates. With how bad the stock traded on Monday, it appears that NXP is headed even lower. With $60 likely on the cards, the recommendation is to load up on the stock at that level with the automotive sector and mobile wallet leading the growth opportunities of the future.

Disclosure: I/we have no positions in any stocks mentioned, but may initiate a long position in NXPI over the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: The information contained herein is for informational purposes only. Nothing in this article should be taken as a solicitation to purchase or sell securities. Before buying or selling any stock you should do your own research and reach your own conclusion or consult a financial advisor. Investing includes risks, including loss of principal.