The iShares Semiconductor exchange-traded fund recently hit a record high, but not all chip stocks are benefiting. In particular, chip stocks that do business with auto makers are struggling. However, NXP Semiconductors may be an exception to this trend.
Auto Exposure and Disappointing Guidance
With a whopping 56% of its sales coming from the auto industry, NXP is heavily exposed to the slowdown in the sector. In November, the company provided disappointing guidance, projecting fourth-quarter sales of $3.4 billion, representing a meager 2.7% year-over-year increase. This is a significant deceleration compared to the 7% annual growth rate it had maintained over the past five years. Consequently, NXP’s stock has declined by approximately 5% since reaching a record high in December.
However, despite these challenges, there are reasons to remain optimistic about NXP’s future performance.
Inventory Management and Tight Control
NXP stands out for its impressive inventory management practices. While other chip makers have struggled with excess product due to weakened consumer and business demand, NXP has consistently reduced the number of days its products remain on the shelves. The company’s Chief Financial Officer, William Betz, emphasized their laser focus on tightly controlling channel inventory during the third-quarter earnings call. It is highly likely that this commitment to managing inventory effectively continued into the fourth quarter.
On February 6th, NXP is set to report earnings of $3.66 per share. This presents an opportunity for the company to shine despite its significant exposure to the auto industry. By delivering strong financial results, NXP can defy the sector’s weakness and demonstrate its resilience.
In conclusion, although chip stocks tied to auto manufacturers have experienced declines, NXP Semiconductors has the potential to outperform. While avoiding broader industry headwinds, the company’s effective inventory management and upcoming earnings report provide a foundation for growth.
NXP’s Positive Outlook and Potential for Earnings Upsurge
Leaner inventory levels indicate that NXP’s products are experiencing steady demand, contributing to the company’s strong position at the beginning of this year. Furthermore, this could enhance its pricing power and boost its gross profit margin beyond expectations. Therefore, it wouldn’t be surprising if NXP surpasses fourth-quarter earnings estimates again—a pattern that has persisted in 12 out of the past 13 quarters.
Analyst Matthew Ramsay from TD Cowen expresses optimism, stating, “We see careful inventory and channel management creating a healthy setup in 2024.”
According to FactSet, analysts predict a gradual increase in auto sales from $1.89 billion in the fourth quarter of 2023 to $2.15 billion by the fourth quarter of this year. Overall sales growth is projected to be in the low single digits, reaching $13.5 billion. Mizuho Securities analyst Vijay Rakesh suggests that the gross margin will likely remain at approximately 58% this year as current pricing efforts aren’t expected to fully offset slightly higher input costs. However, what the market truly seeks is evidence that demand in the auto industry and other segments will stabilize in the coming year and improve thereafter.
Simultaneously, NXP should experience a slow increase in expenses, such as research and development, allowing its bottom line to grow by just under 10% in 2025. The company is also actively reducing interest expenses. Furthermore, as NXP continues to buy back shares, earnings per share are expected to increase by slightly over 10%, amounting to $16.01.
Despite these positive prospects, the valuation of NXP stock does not reflect its potential for growth. Currently trading at 15.3 times earnings for the next 12 months, it represents a 38% discount compared to the iShares Semiconductor ETF’s 24.9 times, even though historically NXP has traded in line with the sector. Therefore, if NXP meets or exceeds profit expectations, it is likely to drive the stock price higher throughout this year.
As the next earnings report approaches, it could serve as a catalyst to initiate this upward movement.