Capital Ideas manages Covestor’s Macro Plus Income portfolio. On April 6 and 8th, NXP Semiconductor NV (NASDAQ: NXPI) was added to the portfolio. NCP Semiconductor is a global semiconductor company and supplier to the electronics industry. We asked Capital Ideas manager CJ Brott if he could provide some insight into the decision to buy NXPI. His response follows.
Recently we chose to start a position in NXP Semiconductor using the following logic:
- We have followed Phillips Electronics for many years and in 2006 they spun out NXPI as a heavily leveraged collection of related business.
- Last August NXPI began trading as a public company; recently they have begun to clean up the balance sheet with a secondary offering proceeds of which were used to repay debt.
- The company is refocusing away from an almost pure digital semiconductor company to a high performance mixed signal analog/digital format. This is an area of great interest to us as we believe the future of mobile wireless is a mixed signal future.
- Using street estimates we believe the company has entered a very high growth phase in their earnings cycle. Reducing debt and focusing on higher margin business produces earnings estimates of $3.16 in 2012. We think that may be conservative. Although street estimates of current value place the stock around $32 per share, we place our price target 18 months out at around $48 per share. We expect a large expansion in P/E valuation as two major currently overlooked factors become more fully appreciated:
- The expanding margins and lack of interest expense (currently around $1.20 per share) should accelerate earnings and earnings growth rates beyond current expectations.
- The company’s expertise in near field technology should give it a huge boost in analyst coverage and a significant expansion in P/E as the move into wireless mobile transactional business takes hold here in the USA.
We had hoped to put off purchase of NXP until market weakness brought the price back to a lower level. However the Texas Instruments (NYSE: TXN) and National Semiconductor (NYSE: NSM) transaction forced us to start a position as NXPI was caught up in the excitement surrounding the deal. As the market weakens we expect to add to the position if the price of NXPI comes in significantly.
Sources:
“NXP Semiconductors NV” TheStreet.com. https://www.thestreet.com/quote/NXPI/details/earnings-estimates.html
