2023-07-25 12:20:48 ET
Summary
- NXP Semiconductors N.V. reported a double beat for Q2 2023, but the company still isn't reporting growth.
- The automotive semiconductors company is still facing headwinds from multiple weak categories and inventory restrictions.
- The stock remains reasonably attractive at 15x forward EPS targets, but NXP Semiconductors is likely due for a pause until growth returns.
NXP Semiconductors N.V. (NXPI) rallied substantially into the Q2 2023 results due to some excitement over normalized automotive demand. The chip company is still reporting flat revenues while under-feeding the automotive channel in a hit to revenues. My investment thesis is Bullish on the stock, but NXP Semi. likely needs to consolidate the gains of the last few months.
Solid, But Not Spectacular
After the close on Monday, NXP Semi. released Q2 '23 results with the following numbers:
The semi. company easily sailed past analyst estimates, but investors need to understand the numbers were still down from last year. The company beat Q2'23 revenues estimates by $90 million, but revenues slipped slightly from Q2'22 levels.
While revenue growth has been a struggle, in large part due to automotive inventory issues, NXP Semi. is still reporting massive profits with operating margins of 35.0% Even in a tough operating environment, the semi. company has the numbers to produce $556 million worth of free cash flow.
The company used these cash flows to pay a $264 million dividend for a yield of nearly 2%. In addition, NXP Semi. repurchased $302 million worth of shares causing capital returns to slightly exceed the FCF produced in the quarter.
One reason NXP Semi. can be aggressive on capital returns are the strong financials ahead. On the Q1 '23 earnings call , the company discussed the ongoing inventory issue that will could ultimately boost revenues by $120 million, if the chip company wasn't keeping extra inventory.
NXP Semi. should ultimately return to 10% growth rates due to all of the additional technology content going into new automobiles, especially EVs. The company did report 9% YoY growth in automotive during Q2, but this number suggests no catch up during the quarter.
The big headwinds remain in Industrial & IoT down an incredible 19% YoY and Mobile where sales were down 27% YoY. These 2 sectors contributed to a revenue hit of $239 million in Q2 YoY while automotive could only add $153 million in additional revenues.
Automotive is now far in excess of 50% of revenues. Without any headwinds from these other categories, NXP Semi. would be reporting solid growth rates as Comm. Infrastructure boosted sales by 15% while Automotive is still only growing at the low end of a forecasted growth rate of 9% to 14% annually.
Time For A Pause
The pivotal point with the Q2'23 earnings is that NXP Semi. has rallied from around $160 when the company reported Q1 results to $210 now. The big 25%+ gain has slightly altered the valuation equation.
The other semi. stocks compared in the prior research have actually rallied even more. Marvell Technology ( MRVL ) is up over 50% during the quarter and now trades at a far more stretched P/E multiple. ON Semiconductor ( ON ) ran a similar amount causing Rosenblatt to downgrade the peer stock .
If anything, NXP Semi. is an even further bargain after the quarterly rally left the stock further behind the group. The company guided to a Q3'23 EPS of $3.60 with guidance for flat revenues.
Going back for the last year, NXP Semi. constantly beats analyst estimates by at least $0.10 per share. The Q2 guidance following the Q1 report was a mid-point of $3.28 with a high end target of $3.49.
The company ended up reporting a $3.43 EPS. By those standards, NXP Semi. should approach a Q3 EPS of $3.80 versus the $3.81 reported last Q3.
In essence, NXP Semi. is generally forecasting Q3 numbers flat with last year. Part of the reason for the constant surprise EPS boost is that share counts continue to dip with a Q3 guidance of 261.3 million shares, down from 264.7 million shares last year during a tough growth period while the shares were 278.7 million back in Q2'21.
Takeaway
The key investor takeaway is that NXP Semiconductors N.V. is still a relative bargain here. The stock has rallied with other semi. and tech stocks and appears set for a pause. The company still isn't growing revenues due to a couple of tough markets and ongoing inventory issues. After a pause, NXP Semi. will continue heading higher due to long-term growth trends.
For further details see:
NXP Semiconductors: Cheap, But Due For A Pause