NXP Semiconductors: Minor Disappointment With Hidden Upside

| About: NXP Semiconductors (NXPI)

Summary

NXP Semi reported solid Q1 numbers that were a minor disappointment from original post merger expectations.

The company is aggressively buying stock again despite forecasts that aren't so positive.

The stock is a bargain with some hints that the company is low-balling the upside potential.

While NXP Semiconductors (NASDAQ:NXPI) generated Q1 results that exceeded analyst estimates, the general tone of the results were a minor disappointment. At the time of the merger, analysts expected significantly higher numbers in 2016 and beyond.

Source: NXP Semi presentation

The original promise of the merger with Freescale Semi collapsed under the weight of the industry including such items as the sales declines from a key customer like Apple (NASDAQ:AAPL). The stock at $85 might still offer some opportunity, but clearly long-term investors aren't pleased with the current price after peaking at $114 last year.

The key to the investment story is that pro-forma revenues declined an astonishing 11%. The media generally repeats the 52% YoY revenue growth figure that adds Freescale Semi revenues to the Q1 numbers without including their revenue in the corresponding quarter last year. This comparison is absolutely worthless from an investment standpoint.

Consequently, the market was satisfied that NXP Semi earned $1.14 for Q1 that was well below the amount earned last year despite the promises of a very accretive merger. Even the mid-point guidance for the Q2 EPS of $1.35 was far below the $1.57 earned in same period in 2015.

Source: NXP Semi Q1'16 earnings release

The guidance for sequential revenue growth of up to 8% is solid, but don't forget this is only a bounce back from depressed levels.

The company remains on pace to generate cost synergies of $200 million this year and $500 million in 2017. Considering the new company only has 351 million shares outstanding, the incremental benefit to next year's EPS is roughly $0.85 and a total of $1.42 per share. In essence, the majority of the earnings gains from the 2015 level of $5.60 to the 2017 estimate of $7.49 are the cost savings.

These estimates are far below the original targets that were seen as realistic due to the combination of revenue growth, cost synergies and the accretive benefits of cheap debt in the deal. Analysts projected the following EPS targets:

  • 2016 - $8.00
  • 2017 - $9.50
  • 2018 - $11.00

Clearly these amounts aren't going to be achieved in the current climate in the semi market, but investors need to keep in mind that end market demand is likely to improve. Customers like Apple should see a pick up in demand with the next smartphone release and connected cars will drive growth.

While the company waits for a market rebound, NXP Semi is generating some benefits from having a lower stock price. During Q1, the company bought 4.1 million shares for $298 million. The end result combined with a Q4 buyback is that the share count was down to 351 million shares outstanding on average for Q1, far below the estimate of 367 million shares when the deal was announced.

The company has historically bought shares at opportunistic times including the keen ability to pull buybacks during the merger when the stock surged above $100.

NXPI Chart

NXPI data by YCharts

The key investor takeaway is that some of the projections by NXP Semi appear very low-ball and more reflective of the current weak market. Even so, the stock still appears cheap based on the current EPS estimates. The huge upside is that investors buying at $85 get to buy alongside a company that appears a lot more opportunistic with their cash than with the current forecast for the future.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within 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.

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