Analysts Will Push NXP Semiconductors To A New High

Key Points

• NXP Semiconductor had a solid quarter and guided above consensus. 
• Capital returns are strong and should continue through year-end. 
• Analysts are raising their targets and leading the market higher. 

NXP Semiconductors NASDAQ: NXP did not have a blowout quarter, but the results are good enough that analysts praise the news. The takeaway from the chatter is that another steady quarter with solid cash flow supported by the company's diversification has come and gone.

The results, better than expected, also led to an increase in guidance viewed as cautiously optimistic by analysts. The takeaway is that analysts are raising their price targets and leading the market higher; how high we won’t know until later this year.

The Q2 results and guidance sparked 7 revisions within the 1st 24 hours after the release, all bullish. There were no rating changes, and the Marketbeat.com consensus remains a firm Hold, but all included a price target increase.

The new target range is $200 to $260 compared to the consensus of $216, suggesting the market will move above the broad consensus. As it is, the $216 consensus figure assumes the market is fairly valued but is trending higher and can be expected to continue to do so. 

NXP Semiconductors Beats And Raises 

NXP Semiconductors had a solid quarter with results underpinned by outperformance in all segments. The company reported $3.3 billion in net revenue for a decline of -0.3% compared to last year. The revenue beat the consensus by 280 basis points, and the strength was compounded on the bottom line.

The Communication Infrastructure segment grew the strongest at 15%, followed by a 9% increase in Automotive. The Mobile and IoT segments declined 27% and 19% but are expected to pick up soon and return to growth next year. 

The margin news is also good. The company widened the adjusted gross and operating margin by 20 basis points to leverage the top-line strength. The adjusted earnings came in at $3.43, which is $0.15 better than expected and up 7.5% compared to last year.

Cash flow from operations was also strong at $756 million, with $556 million in free cash flow, which is an important metric for income investors. NXP aims to return a high level of its free cash to investors. Looking forward, the company expects Q3 EPS in a range with the midpoint above consensus also good news for income investors. 

NXP Semiconductors Is A Capital Returning Machine

NXP Semiconductors, a capital-returning machine, paid 102% of its FCF to investors last quarter. The company pays a dividend worth about 1.85% and more than doubled that return with share repurchases. Share repurchases topped $300 million for the quarter, or about 5% of the post-release market cap, and should continue through the end of the year. Among the analysts' chatter takeaways is that Q2 may be the bottom of the cycle, and an inflection point is close. 

Institutional interest helped the stock to complete its reversal earlier this year. The institutional activity spiked in Q1 to the highest level in 2 years, with 76% of the activity buying. The spike in activity is consistent with the onset of the rally at the end of Q1 and has the total ownership up to 90%.

Institutional activity has slacked off since then and may become a headwind. Until then, the activity in Q3 is light but bullish on balance. So long as that trend is in effect, the stock should continue to rally. 

The Technical Outlook: NXP Semiconductors Could Hit New Highs 

The price action is muted following the Q2 release, but the trend is bullish. Assuming the market can consolidate at the current level, it should be able to move up to set a new high. Moving to a new high would be a trigger for many traders and may lead to an increase in upward momentum. In this scenario, the stock could move up to the top of the analysts' range or higher.

If the underlying business improves as expected, the rally could sustain well into 2024. The stock also offers a deep value among semiconductor stocks; a multiple expansion could see it more than double in value.