NXP Semiconductors: A Buying Opportunity Amidst Weakness in Auto-Related Chip Stocks
- Wednesday, October 16, 2024
The semiconductor industry has been experiencing significant growth, with the iShares Semiconductor exchange-traded fund reaching a record high recently. However, chip stocks that do business with auto makers have been struggling, presenting a unique buying opportunity in NXP Semiconductors. Despite relying heavily on sales from the auto industry, NXP has the potential to outperform its peers when it reports earnings in February.
Many chip stocks with exposure to auto companies, such as Texas Instruments, ON Semiconductor, and Mobileye Global, have been issuing warnings about the industry slowdown and witnessing a decline in their stock prices. This trend should make investors cautious about NXP, as it derives 56% of its sales from the auto industry and provided disappointing guidance in November. The company stated that it expected fourth-quarter sales of $3.4 billion, representing a mere 2.7% YoY growth. Comparing this to the 7% annual growth it had reported over the previous five years, it is evident that NXP faced challenges. Consequently, the stock has declined approximately 5% from its all-time high in December.
Despite these concerns, there are several reasons to believe that NXP will thrive following the release of its earnings report on February 6th. Firstly, the company has effectively managed its inventory, which sets it apart from other chip makers who have struggled with excess product due to weak consumer and business demand. NXP has been successful in reducing the number of days its products remain on shelves, showcasing its commitment to tight control over channel inventory. William Betz, the Chief Financial Officer of NXP, emphasized this focus during the third-quarter earnings call. It is likely that this emphasis on inventory management continued throughout the fourth quarter.
Therefore, despite the challenges posed by its significant reliance on the auto industry, NXP Semiconductors has the potential to bounce back and exceed expectations when it announces its earnings. By effectively managing its inventory and demonstrating a laser-focused approach on controlling channel inventory, NXP will likely navigate the current industry weakness and regain its positive momentum.
Leaner Inventory Levels Indicate NXP's Resilience Amidst Challenging Conditions
Leaner inventory levels signal that demand for NXP's products is holding up fairly well, demonstrating the company's ability to navigate challenging market conditions. This positive trend not only bodes well for NXP's overall financial health but also enhances its pricing power, leading to a potential boost in gross profit margins. With a track record of exceeding earnings estimates in 12 out of the past 13 quarters, it won't be surprising if NXP's fourth-quarter earnings outperform expectations once again.
Promising Outlook for 2024
TD Cowen analyst Matthew Ramsay believes that careful inventory and channel management will foster a healthy setup for NXP in 2024. This strategic approach supports the company's future growth prospects, positioning it for success in the years ahead.
Gradual Recovery in Auto Sales Expected
According to FactSet, analysts predict a rebound in auto sales, projecting an increase from $1.89 billion in the fourth quarter of 2023 to $2.15 billion by the fourth quarter of this year. Although overall sales growth is anticipated to be in the low single digits, reaching $13.5 billion, the market seeks tangible evidence of improving demand in the auto industry and other sectors.
Steady Bottom Line Growth and Share Buybacks
While pricing efforts may not fully offset slightly higher input costs, Mizuho Securities analyst Vijay Rakesh predicts a flat gross margin of approximately 58% for this year. However, NXP's bottom line is expected to experience just under a 10% increase in 2025, largely driven by gradual growth in expenses such as research and development. Additionally, the company's ongoing share buybacks will contribute to a moderate rise of over 10% in earnings per share, amounting to $16.01.
An Undervalued Investment Opportunity
Despite the company's positive outlook and growth potential, NXP stock currently trades at a 38% discount to the iShares Semiconductor ETF, with a forward price-to-earnings ratio of 15.3. Historically, NXP has traded in line with the sector, making it an undervalued investment opportunity for discerning investors. If NXP can meet or exceed profit estimates, it is likely to witness a substantial increase in stock value this year.
The upcoming earnings report could serve as the catalyst to ignite this anticipated upward movement.
All Rights Reserved © 2024
Post a comment