NXP: Advantages Of Shrinking Share Counts

|
About: NXP Semiconductors (NXPI), Includes: QCOM
by: Stone Fox Capital

Summary

NXP Q3 results beat the worst fears in the market.

The company repurchased ~14% of the outstanding shares in the quarter.

Along with an additional 20 million share buyback, NXP will induce a major EPS surge not reflected in analyst estimates.

The stock is still cheap with an EPS stream approaching $10.

So far, NXP Semiconductors (NXPI) is a prime example of a stock buyback plan that has worked and will highly reward shareholders. The semiconductor company parlayed the $2 billion breakup fee from the Qualcomm (QCOM) merger along with some debt into a massive share reduction on historical proportions all while the business continues moving along. My previous research provided the game plan for investors to take advantage of the recent selloff and continues to remain supportive of the stock here in the mid-$80s.

Image Source: NXP Semi. website

Massive Share Buyback

As the stock collapsed in the months following the ending of the Qualcomm merger and in October with the tech wreck, NXP was buying shares into that weakness. The company spent an incredible $4.6 billion on share buybacks in Q3 alone, spending $2.6 billion more than the Qualcomm breakup fee.

Chart NXPI data by YCharts

The stock only has a market cap of about $30 billion, so NXP spent more than 15% of the market cap on share buybacks during the quarter alone. The average diluted share count dipped to 325 million for the quarter. The key here is that the actual share count at the end of September was ~296 million since the company repurchased 49 million shares in the period.

Chart NXPI Average Diluted Shares Outstanding (Quarterly) data by YCharts

In October, NXP repurchased another 5 million shares and approved the repurchase of an additional 15 million shares. In total, these 20 million additional share repurchases would reduce the share count to ~276 million shares outstanding. Considering the aggressive buybacks already, one can be confident that the company will follow through with these repurchases.

Big EPS Boost

These lower share counts provided a tremendous boost to EPS estimates. When combined with solid Q3 results that were better than some worst fears when the stock dipped to a low of $69.72, NXP got a natural big boost.

Note that NXP didn't exactly have a great Q3. Revenues were only up 2.5%, but the numbers were far better than a lot of the negativity building up in the market following other semiconductor September quarterly reports.

The company did have a huge boost to operating margins that was part of the story coming out of the Analyst Day following the termination of the Qualcomm merger. The company grew operating margins to 30% with a forecast of eventually reaching the mid-30% range.

The stock in the mid-$80s remains far too cheap with 2019 EPS estimates tipping up toward $8.50. The estimate was previously around $7.50, but a 20% reduction to the share count alone is good for a boost far above $9.00, not the current estimate of $8.55.

Chart NXPI EPS Estimates for Current Fiscal Year data by YCharts

Some simple math here gets NXP closer to $9.50 per share next year. The original calculation is based on roughly $7.50 EPS estimates prior to the merger breakup and big buyback program.

  • Net income estimate: $7.50 EPS at 347M shares = $2,600M
  • New share count: 276M shares (September count - 20M additional buybacks)
  • Updated EPS estimate: $2,600M/276M shares = $9.43

Even the company made the point of mentioning that earnings will beat analyst expectations. Companies tend not to make these statements unless analyst estimates are far off from reality. Per CEO Richard Clemmer on the earnings call:

"Our outlook for fourth quarter reflects a wider than normal top line revenue range due to the cloudy demand environment. Our top line revenue expectations are driven by content gains which, combined with improved operating expense control and lower share count, should result in earnings above analyst expectations."

Clearly, the company sees some risks of lower demand in the short term in the key automotive sector and other semiconductor markets. The share buybacks and operating margin improvements provide substantial tailwinds to counter any market demand issues. Just reaching a 33% operating margin provides another potential boost to operating income that would further exceed the lower share count induced EPS surge.

The above calculation doesn't even factor in 5%-plus annual revenue growth due to strong end markets in connected autos and secure devices. Analysts currently have projections for limited revenue growth over the next year.

Takeaway

The key investor takeaway is that NXP currently trades for about $84 with an earnings potential of close to $10. The stock is far too cheap and the company wisely and aggressively took advantage of the market weakness in likely one of the best stock buyback programs in history.

Disclaimer: 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.

Disclosure: I am/we are long NXPI, QCOM.

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.