NXP Semi: Up 643% Since IPO, the Story’s Not Over, Says Bernstein
By Tiernan Ray
May 12, 2015, 10:45 A.M. ET
Shares of chip maker NXP Semiconductor ( NXPI) are up $1.60, or 1.5%, at $101.97, after Bernstein Research’s Stacy Rasgon this morning initiated coverage of the name with an Outperform rating, and a $133 price target, writing that the stock has already been a “home run” since its IPO in 2010, but that there’s more to come as the company heads toward its merger with Freescale Semiconductor ( FSL).
“In short, we believe the story is not yet over,” he writes.
“Over the intervening 5 years or so [since IPO] the stock has returned more than seven-fold to investors, a ~50% compounded annual return over the time period, due to a combination of improvement in fundamentals, deleveraging, and multiple expansion,” notes Rasgon.
Rasgon sees a few reasons why there’s more upside left:
In particular, we believe the company can likely maintain their above-market revenue growth trajectory, due in large part to the structural benefits of automotive exposure and continued growth in mobile payments, with overall revenue diversification helping to at least partially mitigate downside from any one given market. We believe the forthcoming Freescale acquisition may hold more to it than meets the eye. And we believe (with $9-$10 in likely earnings power post-deal) that valuation is compelling.
Rasgon likes the profile of the part of the company that is “high-performance mixed-signal” chips, which makes up just under 75% of total company revenue.
Such “HPMS” chips go into the sensor hub that collects sensor data in Apple’s ( AAPL) iPhone, for example; and a lot of it goes into connected cars, and things such as digital identification for electronic passports.
Rasgon is very excited about the automative and the NFC transactions capabilities in mobile (such as Apple’s Apple Pay):
Automotive: ~25% of NXPI’s HPMS business, with a leadership position in audio entertainment, in- vehicle networking, and secure car access. Overall we are positive on the auto semiconductor market in general and believe trends around content increase can disproportionately benefit NXP. The company believes it can grow faster than the SAM of the auto markets they target (6-7%), with growth targets of 8-9%. The FSL acquisition will further solidify their presence in automotive in complementary markets. Secure Connected Devices: ~25% of HPMS, a bit of a hodgepodge of business that include multimarket microcontrollers, mobile audio/sensing, low-power RF/IoT, and silicon tuners. However, it also includes NXPI’s mobile transactions business (e.g. near-field communication), about ~$400-450MM currently and with the potential to drive very strong growth as we remain in the early days of mobile payments.
Of “secure ID” portion, including the government e-passport work, he writes “overall, this business is the most difficult to forecast due to lumpiness of government projects.”
The other 25% of company revenue is “standard products,” of which Rasgon writes, “This is primarily a discretes business, with lower growth and margins than HPMS. NXPI likes to say that it is the “best” discrete business out there (and they may be right); it is a candidate for sale if the company can ever drum up enough interest at the right price. In the meantime, it generates cash.”
Rasgon’s very positive on the pending Freescale deal:
We think the deal makes sense strategically, with a more complete product portfolio, cost synergy, and potential revenue synergy down the line. We believe cost synergies (~14% of current combined opex, as well as scale benefits) appear reasonable, and NXPI may be able to accelerate the leverage inherent in FSL’s current model […] Finally, there could be additional revenue and/or balance sheet synergies (including debt refinancing) that could drive more upside […] The combined company will hold more than $11B in annual revenues, making it the largest semiconductor supplier to the automotive and MCU markets, and one of the largest semiconductor companies overall […] Additionally, it is likely that NXPI can do positive things with FSL’s balance sheet, particularly given the latter is paying interest at a higher rate than the former. We also note that the sale of NXPI’s high-performance RF business (whatever it might sell for) should bring in additional cash that can be deployed to further de-lever the balance sheet.
And NXP stock is a good value considering the earnings power of the combined companies, he writes:
NXPI’s current valuation appears fair. However, valuation for the combined company significantly improves once taking into account appropriate cost synergies. – In particular, the combined company (on a pro-forma basis) would likely be trading at ~10-11x P/FE, extremely attractively valued. On an EV/sales or EV/EBITDA basis, the company trades in line to slightly below peers on the same basis, for substantially higher growth potential. Hence, we view valuation as compelling. The standalone company has been trading at ~14x NTM EPS for the last year prior to the deal announcement; we believe such a valuation on the combined company is fair as well. On a potential $9-$10 in normalized combined EPS, this would correspond to a ~$133 target price.