Author: CJ Brott, Capital Ideas
Covestor models: Macro Plus Income, ETF Only
Disclosure: Long BHI, CAT, JOY, NXPI
In August we wrote about two portfolio additions, Caterpillar (CAT) and Baker Hughes (BHI). This month we added Joy Global (JOY) and NXP Semiconductor (NXPI).
Because the portfolio is managed with broader macro events and conditions in mind we thought this would be a good time to analyze our thinking and our positions. Briefly we are betting somewhat against the dollar. If the dollar weakens further, or fails to strengthen materially, we believe our industrial companies, Caterpillar and Joy Global, will do well.
In addition, we expect energy prices to head higher, which should be good for Copano (CPNO) and Devon (DVN). Ford Motor (F) is helped somewhat by a weaker dollar.
Our ideas are not all based on dollar weakness. We also have special situations that are more influenced by the strength of the US economy. Obviously Ford Motor’s business is one such situation, as the current majority of its earnings and sales come from North America.
Also, we believe the well known problems with Europe are discounted in its price and we hope that the unexpected success in China will be a price catalyst going forward. In addition, Coinstar (CSTR) and Inventure Foods (SNAK) are consumer discretionary stocks and thus dependant on domestic economic strength.
We hope Coinstar will benefit from its expansion into coffee and other venues along with the expansion from its buyout of NCR’s video boxes. We believe that Inventure should continue to benefit from the move toward healthier eating.
The newest addition to our portfolio is NXP Semiconductor. Because it is a European company, dollar weakness helps, but that is negligible. The real story for NXP Semiconductor is strength in semiconductors. This industry is about mid-cycle in the expansion phase.
The chip company stumbled earlier this year but now seems to be on track for a large gross margin expansion going forward. If they are successful, street analysts expect earnings to go from an estimated $1.78 this year to $2.77 in 2013.
That expansion would be accomplished not merely by rising sales volume but continued aggressive debt pay down. Since they were spun out by Philips (PHG) they reduced debt from nearly $5 billion to under $3 billion.
According to analysts at Credit Suisse, NXP Semiconductor may well reduce debt to under $2 billion by fiscal 2013. That, combined with current cash on the balance sheet of nearly $900 million, gives them the balance sheet strength and expanded margins to command an industry P/E which, according to Credit Suisse.
Last but not least is the sizzle that comes with all good fundamental stock stories. NXP Semiconductor is the recognized leader in NFC identity applications. These are the applications that are going into most new smartphones and are powering electronic wallet applications.
Google (GOOG) used their designs in its wallet and Apple (AAPL) is announcing its iPhone 5 soon. Although identity is currently only 20% of NXP Semiconductor’s business, it controls a majority of the NFC patents.
Early investors in Qualcomm (QCOM) will remember that it controlled most of the CDMA patents and should easily see the value in NXP Semiconductor’s patents.
Credit Suisse believes NXP Semiconductor will be worth at least $33 in the next 12 months. Deutsche Bank recommended the stock on September 5th and we believe others will follow. We are excited to be back in the stock and look forward to further news.
Performance discussed is net of advisory fees. Also, any investments discussed in this presentation are for illustrative purposes only and there is no assurance that the adviser will make any investments with the same or similar characteristics as any investments presented. The investments are presented for discussion purposes only and are not a reliable indicator of the performance or investment profile of any composite or client account. Further, the reader should not assume that any investments identified were or will be profitable or that any investment recommendations or that investment decisions we make in the future will be profitable.
