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NXP Semiconductors Is Set To Rise Heading Into SPS Sale

Summary

The merger of NXP and Freescale should improve the profitability of the companies.

The SPS sale should act as a catalyst for a higher equity valuation.

Given the valuation relative to the Nasdaq and the industry, shares of NXP are undervalued.

NXP Semiconductors N.V. (NASDAQ:NXPI) is a global semiconductor company that provides high performance mixed signal and standard product solutions in radio frequency, analog, power management, interface, security and digital processing products. The company's products are used in automotive, identification, wireless infrastructure, lighting, industrial, mobile, consumer and computing.

A combination of NXP's solutions and management's business savvy has produced outstanding growth over the past few fiscal years. On a generally accepted accounting principle basis, sales have grown from $4.8B in FY13 to a forecasted $9.5B in FY16. The acquisition of Freescale Semiconductor is responsible for a large portion of the sales growth.

With that stated, within the investment analyst community, there is chatter about declining sales if these two companies were still being run separately. The fact is the companies are combined and the financial results are consolidated with NXP the acquirer for accounting purposes, meaning NXP is expected to increase sales by 56% during FY16. If demand is a bit on the weak side right now, industry consolidation is a positive for investors. Additionally, the end market solutions in automotive, wireless infrastructure and mobile remain technologically relevant.

From a risks perspective, the cyclicality in the semiconductor industry is a key risk. Also, following the sale of the standard product solutions segment, NXP's exposure will be more highly geared to Apple (NASDAQ:AAPL)...


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