As we started 2022, investors aggressively shed exposure to the tech industry. Concerns over high valuations in a raising rate environment was a key driver for this price action.
This type of environment opens opportunities as good names can get caught up in the price action. The proverbially ‘throwing the baby out with the bathwater’. This action has been amplified by ETFs which can group sectors together.
There are several names that we will discuss in the coming weeks that fall into this category. One of the names posted its Q4 earnings report card last night. We want to take a closer look at NXP Semiconductor (NXPI).
NXPI provides mixed signal and standard semiconductor products based on security, identification, networking, and radio frequency. The company’s products are used in automotive, identification, wired and wireless infrastructure.
Examples of its chips in use include vehicle networking, keyless entry and immobilization and car radios. The company also invented near field communications (NFC) which enables mobile phones to be used to pay for goods and store and exchange data securely.
It is the company’s exposure to the auto industry that catches our attention. NXPI garners approximately 50% of its revenues from this white-hot industry. Auto is an area where the semi chip supply issues are front and center.
The company said that it saw demand accelerate since it’s November Investor Day. Supply remains constrained as factory shutdowns impact semiconductor companies’ abilities to meet customer requests. NXP highlighted the shut down of its Tianjin facility as the latest example of supply issues. Strong demand and light supply open plenty of opportunity for growth and profitability.
Key industry metrics suggest that the problem is likely to persist throughout 2022. The constraints lead auto companies to build more premium vehicles which are flush with new tech bells and whistles in need of these high-end semiconductor chips. These dynamics all work into NXPI’s favor.
The company has $4 billion of long-term material supply obligations. CapEx investments will be above prior expectations as the company investments focus on external foundry wafer supply, an expansion of its internal back-end capacity and a modest expansion of its front-end capabilities. The added costs will easily be covered by improving margins.
Taking a closer look at the financials, NXPI reported Q4 revenues increased 21% year-over-year to $3.04 billion, slightly better than the $3.00 billion expected.
Non-GAAP operating margins increased 440 basis points to 34.9%. This was 110 bps above the company’s guidance. This reflects the strong pricing power NXPI enjoys in the current conditions. The performance was driven by improved factory utilization and higher revenue with a better product mix.
NXPI issued upside Q1 guidance as it projected revenue in the range of $3.025-3.175 billion with the mid point of revenues increasing 21% year-over-year.
Automotive is expected to be up in the mids-20% range and flat q/q. Industrial and Internet of Things is expected to be up in the mid-teens y/y and flat q/q. Mobile is expected to be up approximately 10% y/y and low single digits q/q.
There was some concern that the company saw flat sequential growth in its key auto segment but that was due entirely to the supply constraint issues facing the industry.
Inventories across all end markets appear very.
NXPI is confident in the long-term picture which is why it sees the 2022 revenue growth guidance of 8-12% y/y at the high end.
NXPI remains one of the better capital return stories in the semiconductor space. The Board of Directors announced a 50% increase to the quarterly cash dividend. It also approved a new $2 billion share repurchase. This brings the total repurchase capacity of $3.35 billion. These align with the company’s capital allocation strategy.
Cash flow generation continues to be excellent. Free cash flow for the year was $2.31 billion or 21% of revenue.
During 2021, NXPI repurchased 20.6 million shares for a total of $4.02 billion and paid cash dividends of $562 million. This means NXPI returned $4.58 billion, nearly 200% of FCF.
Shares of NXPI are sitting right on the 200-day moving average ($207). This is a key inflection point for the company. The overall market environment remains choppy which could lead to another episode of NXPI shares slipping lower with the broader market.
But given the operating environment and capital return plan, NXPI is a name that we would start to accumulate in this tape.