NXP Semi: Slipping Away For Now

| About: NXP Semiconductors (NXPI)

Summary

NXP Semi reporting solid Q2 numbers, but the company is far from delivering the promises of the merger with Freescale Semi.

Investors are faced with shrinking EPS estimates for 2017 as end markets remain subdued.

Despite the stock being cheap, the catalyst to a higher price is still out in the future.

The NXP Semiconductor (NASDAQ:NXPI) merger with Freescale Semi promised huge synergies and a dominant position in the automotive sector. The stock though hasn't even approached the highs near $115 generated by the excitement of the merger.

Source: NXP Semi presentation

The company has seen slow demand growth in the key smartphone sector and signs of peaking domestic auto sales detracting from a lot of the benefits of the merger. The question now is whether NXP Semi offers a good opportunity at $85?

The original thesis of the merger was that NXP Semi could generate as much as a 2017 EPS of $9.50. The merger had a target of $500 million in synergies that will be close to fully realized by next year. On top of that, the semiconductor company has repurchased 8.5 million shares that would provide more upside to those EPS estimates.

The problem remains that NXP Semi sees subdued end market demand causing those EPS estimates to continue slipping away. The analyst estimates for next year are now down to only $7.37 per share.

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Source: Yahoo Finance

While plenty of issues exist with the current demand environment, the company is still set up to participate with the auto industries move to autonomous driving. NXP Semi obtained 32% of revenues from the auto sector during 2015 and saw a solid 7% sequential increase in Q2 revenues. Combined with the Secure Connected Devices, the company is at least generating a rebound in the larger sectors.

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Source: NXP Semi presentation

During the earnings call, the company provided a prime example of how the shift to the different levels of driver assistance impacts revenues. For basic level 1, a vehicle will have up to three radar sensors generating up to $35 in revenues. For the full autonomous level 4, a vehicle will have up to 20 radar sensors with revenues exceeding $100 and possibly approaching $200.

This example is a prime reason why auto sales growth is not nearly as important as the additional content pre car. Naturally, the total sales growth is rate is either a headwind or tailwind to their growth.

The key investor takeaway is that a lot of the growth drivers that built up the large EPS estimates for the merger are still possible. Typically though, a stock doesn't rebound until those estimates stabilize and start reversing higher. For this reason, NXP Semi remains a cheap stock, but one to wait for a better entry point.

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