NXP Semiconductors Is Poised to Breakout

Apple (AAPL) suppliers have struggled this year, however NXP Semiconductors (NXPI) is an exception to this trend as the stock has appreciated considerably in the last few months. NXP Semiconductors’ rally is justified by its strong quarterly results.

In Q2FY16, NXP Semiconductors reported earnings per share of $1.39, beating the consensus by $0.04. On the sales front, NXP Semiconductors shared revenue of $2.73 billion, a surge of 57 percent and $20 million better than the analysts’ estimates.
NXP Semiconductors is one of the most significant players in the emerging vehicular automation market. Moreover, the company’s merger with Freescale has nicely supported its growth.

Due to the merger with Freescale, NXP Semiconductors has turned into one of the largest suppliers of sensors, automotive powertrains, and microcontrollers around the globe. At present, NXP Semiconductors holds 14 percent market share in the multi-segmented automotive semiconductor division, a strong lead over most of its peers.

Another thing that helped the company to move upwards is the launch of its new open-source self-driving system known as BlueBox, which permits auto manufacturers to add driverless technology to their vehicles.
NXP Semiconductors Is Poised to Breakout
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This segment is growing at a rapid rate and NXP Semiconductors should benefit from it considerably in the long run.

NXP Semiconductors signed the deal with Freescale for around $2 billion. The company paid half of the cash from its own balance sheet and the rest from debt arrangements. Apart from this, credit rating expert Moody’s has improved the company’s corporate rating to Ba1 from Ba2, with an optimistic prospect for additional upgrades.

At present stage, the company is just below investment grade Baa3 ratings. Due to the robust credit ratings as well as low federal interest rates, the company dragged the trigger on a refinancing by sharing annual interest rate of 3.875 percent from 4.625 percent. This will ultimately result in $4.5 million of yearly interest savings.

Furthermore, in the imminent quarter, the company anticipates to see sales of around $2.42 billion while adjusted gross margins should be around 50 percent, leading to $680 million in non-GAAP operating income. Adjustments comprises of mostly merger associated goodwill balance changes as well as some restructuring costs.

In the long run, the acquisition will greatly benefit NXP Semiconductors. Moreover, the company’s presence in the automotive sector will also act as a significant tailwind. Although NXP Semiconductors’ valuation is a bit steep at 21x trailing earnings, its fundamentals should improve on the back of increased earnings. As a result, I think the stock is a buy at current levels.
Published on Aug 22, 2016
By Prudent Investor

Copyrighted 2020. Content published with author's permission.

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