After the merger drama and the final failure of the merger with Qualcomm (QCOM), it was quiet around NXP Semiconductors (NXPI). Then in June, NXP announced that it will acquire Marvell’s WiFi and Bluetooth Connectivity Assets. In July, NXP provided the figures for the second quarter. As a result, the share price fell by more than six percent in the meantime. However, this only turned out to be a brief disturbance fire, as the price then rose again. So it's time to take a closer look. After providing the highlights of the second quarter, I will analyze the numbers.
Here are the highlights of the second quarter short and sweet:
- Revenue was USD 2.2 billion, down 3 percent year-on-year;
- GAAP gross margin was 51.9 percent, and GAAP operating margin was 7.1 percent;
- Non-GAAP gross margin was 53.3 percent, and non-GAAP operating margin was 28.9 percent;
- Cash flow from operations was USD 517 million, with net capex investments of USD 106 million, resulting in non-GAAP free cash flow of USD 411 million;
- During the second quarter of 2019 NXP repurchased 6.6 million shares for a total cost of USD 645 million.
- Furthermore, the company paid cash dividends of USD 71 million.
Automotive revenue was USD 1.03 billion, down 10 percent year-on-year, in line with guidance. In the industrial & IoT segment, revenue was USD 390 million, down 14 percent year-on-year. This was also in line with expectations as the demand in the broad based China market continues to be very weak. In the mobile segment, revenue was USD 297 million, up 25 percent year-on-year, better than the management expected. The communication and infrastructure segment decreases like expected by 19 percent revenue was to USD 499 million.
The figures were in line with expectations, and the Mobile segment even exceeded expectations. Overall, however, NXP is struggling with the same problems as the industry as a whole. This also has to do with the four business segments and their sizes. NXP essentially addresses 4 end markets:
- Commercial Infrastructure & Other
- Industrial & IoT.
Automotive is the largest segment, accounting for 48 percent of total sales. The segment is followed by Industrial & IoT and Commercial Infrastructure & Other, each accounting for 19 percent of total sales. At 12 percent, the Mobile segment is the smallest. Actually, NXP expects the Automotive and Industrial segments, the two largest segments of its business, to grow most strongly in the next few years.
|End market||Percent of total sales||3-yr. CaGR|
|Automotive||48 %||7-10 %|
|Industrial & IoT||19 %||8-11 %|
|Mobile||12 %||4-6 %|
|Commercial Infrastructure & Other||19 %||0-2 %|
Whether this rate can be met, however, is questionable in view of the current macroeconomic development. As it regards the automotive segment, year-on-year global car production trends continue to be revised down, especially in China and Europe, the two largest auto manufacturing markets, while the North American market slowed modestly. This already had the effect of slightly weaker-than-anticipated shipment in Q2 for NXP.
Given that, the strong dependence of the business on China must also be considered fundamentally. More than two thirds of the company's turnover is generated in China. This dependency could ensure that total sales continue to decline due to the trade dispute with the USA. The trade dispute is still expected to lead to a poor market environment. This is particularly true of China, whose economy is no longer growing as fast as before.
In addition, it is not foreseeable how the trade conflict will develop further. Macroeconomic developments may continue to weigh on the world trade. Furthermore, car production may indeed have reached the peak of its growth cycle. It is not yet possible to predict that the conflict with China will be resolved. Conflicts with Iran and North Korea persist. The existing escalation potential here could start to weigh on the revenue in the nearer future.
Given that, I expect the company to generate less than USD 9 billion in sales in 2019. That would be less than in recent years, but the overall growth would still be impressive.
|(USD in millions)||2010||2011||2012||2013||2014||2015||2016||2017||2018|
(Source: NXP revenue 2010-2018)
However, this has little effect on the overall picture. NXP is extremely well positioned in the Automotive market. NXP offers a huge portfolio for the automotive sector. The following segments are included:
- Driver Assistance Transceivers
- In-Vehicle Network
- Microcontrollers and Processors
- Media and Audio
- Safety and Power Management
- Smart Power Drivers
The demand for such solutions will remain. In particular, demand for automotive electronics is expected to rise steadily, especially for driver assistance systems. On average, a car needs around 18 sensors for semi-automated driving. For fully automatic or autonomous driving, this figure increases to 30. Considering that, NXP has a pretty good market position because the company is in many areas clearly the market leader. Marvell’s WiFi and Bluetooth Connectivity Assets could help NXP to hold this position. The company expect the Marvell business to add about USD 600 million of incremental revenue by 2022, roughly two times its current run rate. According to the earning call from July, the product set and especially the disruptive Wi-Fi 6 portfolio of the Marvell assets will immediately complement NXP's processing, security and connectivity offerings in the end markets of industrial & IoT as well as automotive.
NXP has a trailing-twelve-months P/E ratio of 12.45. Its forward P/E ratio is 14.2. In relation to the long-term P/E ratio, NXP still appears undervalued. Nonetheless, the phases are no longer comparable, as macroeconomic conditions have changed as a result of the trade dispute. But this also applies to the entire industry. If one compares other chip manufacturers like Intel (INTC), Qualcomm and Infineon (OTCQX:IFNNF; OTCQX:IFNNY), NXP is even relatively cheap. Only Intel has a lower P/E ratio. Overall, I would therefore consider the company to be fairly valued.
In addition, NXP also attracts with a dividend. NXP pays a quarterly dividend of USD 0.375. Over the year, the dividend yield is 1.39 percent. That doesn't look like much at first. However, the payout ratio is also extremely low at 15.39 percent. This shows that the company will probably continue to increase its dividend in the future. In addition, NXP is only a young dividend payer and paid its first dividend in 2018. However, this was increased by 50 percent.
After every analysis of a company, I will use a three-grade rating for this series. Its purpose is to ensure that readers recognize at first glance whether a company might or might not be worth investing. The three steps rating at a glance.
Buy the jewel now rather than tomorrow if:
- There are no downsides and the company has growth potential.*
- The upsides outweigh the downsides and the company has enormous growth potential.
Worth an investment (maybe later after a second look) if:
- The upsides outweigh the downsides.
- The upsides are equal to downsides but the company has growth potential.
No thanks if:
- No growth potential in the long term.
- The downsides outweigh the upsides.
*Of course, the growth potential is a part of the upsides, but it is also crucial in my final considerations.
Conclusion: The grade for NXP Semiconductor
Overall, the company is on the right track. For the current uncertainties, however, it appears to be slightly overvalued. On the other hand, investors may speculate on rising dividends and build up a first position. It's not a jewel, though, that you have to buy immediately.
- Overall, good outlook. However, uncertainties remain.
- High dependence on China and automotive.
- In terms of dividends, NXP has a dividend of only 1,39 percent but further increases are to be expected.
- Fundamentally, NXP is only fair valued.
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Disclosure: I am/we are long 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.
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