By Jacob Sonenshine
Chip stocks are flying — except the chip stocks that do business with auto makers. That’s created a buying opportunity in NXP Semiconductors, which should be able to buck the sector’s weakness when it reports earnings in February.
The iShares Semiconductor exchange-traded fund hit a record high this past week, but that didn’t help the companies with exposure to auto companies. From Texas Instruments this past Wednesday to ON Semiconductor and Mobileye Global in recent weeks, auto-focused chip stocks have been warning about the slowdown — and watching their stocks tumble.
Based on auto exposure alone, NXP should be a stock to avoid. It gets 56% of its sales from that industry, and it offered up disappointing guidance in November, when it said it would deliver fourth-quarter sales of $3.4 billion, up just 2.7% year over year. That’s slow growth compared with the 7% annual clip it reported over the previous five years. Those challenges have pushed the stock down about 5% from a record high reached in December.
But there’s reason to believe NXP could flourish after the company’s Feb. 6 results, when it’s expected to report earnings of $3.66 a share. For one thing, it is managing its inventory well. While chip makers have had too much product on hand due to waning consumer and business demand, the number of days that NXP’s products sat on the shelves declined on average from the prior quarter. The company is “laser-focused on tightly controlling our channel inventory,” Chief Financial Officer William Betz said on the third-quarter earnings call. That focus on managing inventory likely continued in the fourth quarter.
Leaner inventory levels signal that demand for NXP’s products is holding up fairly well, all things considered, and that the company has entered this year in decent shape. It could also help its pricing power, which would support its gross profit margin more than anticipated. If that’s the case, don’t be surprised if NXP’s fourth-quarter earnings surpass estimates again, something that wouldn’t be out of the norm for a company that has beaten earnings estimates in 12 of the past 13 quarters.
“We see careful inventory and channel management creating a healthy setup in 2024,” writes TD Cowen analyst Matthew Ramsay.
Analysts expect that auto sales, after a quarter-over-quarter dip to $1.89 billion in the fourth quarter of 2023, will gradually rise to $2.15 billion by the fourth quarter of this year, according to FactSet. Total sales growth are expected to be in the low single digits, at $13.5 billion. The gross margin this year could remain flat, at about 58%, as pricing efforts aren’t currently expected to offset mildly higher input costs, Mizuho Securities analyst Vijay Rakesh writes. But the market just needs proof that demand in auto and other segments will bottom out this year and improve afterward.
Meanwhile, expenses such as research and development should increase slowly enough for NXP’s bottom line to gain just under 10% in 2025. The company is also reducing interest expense. Earnings per share should rise a bit more than 10%, to $16.01, as it’s continuing to buy back shares.
NXP stock doesn’t reflect that kind of growth. It trades at 15.3 times earnings for the coming 12 months, a 38% discount to the iShares Semiconductor ETF’s 24.9 times, when NXP has historically traded in line with the sector. If NXP is able to meet or beat the Street’s profit estimates, it should drive the stock higher this year.
This coming earnings report could be the catalyst to get that move started.