FBR Capital Notes 'Confusion' on NXP Semiconductors (NXPI); Sees Stock Stabilizing and Grinding Higher

FBR Capital analyst Christopher Rolland weighed in on NXP Semiconductors NV (NASDAQ: NXPI) amid the confusion and the sell-off in the stock following results.

Negatives cited by bull and bears, according to Rolland, include: (1) the stock has had a recent run from $54 just over a week ago to $64 yesterday, discounting an optimistic outlook; (2) the company has had a recent history of beating guidance (excluding 3Q14, guidance beat the Street by +500 bps) but only beat by +150 bps for 4Q14; (3) there has been a sizeable inventory build as the company's sell-in revenue to distributors grew +29% QOQ, but sell-through revenue was up only +19%, implying a +10% absolute inventory build (therefore, implying sanguine expectations for shipments in 4Q14); and finally, (4) given the segment guidance and implied mix (excluding falling P&C and Standard Products, which carry lower gross margins), company gross margin guidance should have been higher for 4Q14.

Rolland said while it is difficult to challenge points one and two, as they are mostly sentiment driven, the think points three and four are commonly misunderstood by many on the Street.

• Point No. 3: Distributor inventory build implies unrealistically optimistic sell-through expectations for 4Q14 . . . Likely not! " In most cases, distributor sales often imply shipments to a broad range of smaller customers that do not have the scale to become direct OEM customers. However, in the case of NXP, we believe that Apple may be using Asian distributors, primarily on a fulfillment basis, to supply parts for the iPhone 6."
• Point No. 4: Segment guidance should imply GM increases . . . Not necessarily! "While NXP's segment guidance and mix would normally imply higher gross margins, we think the product mix within each segment was deleterious, as lower-margin Apple shipments become a larger contributor in 4Q14."

"All things equal, we would expect the stock to stabilize here or even to grind higher over the next few days," he said. "But anything goes, as seesawing macro expectations appear to weigh heavily."

The firm maintained an Outperform rating and price target of $76.

For an analyst ratings summary and ratings history on NXP Semiconductors NV click here. For more ratings news on NXP Semiconductors NV click here.

Shares of NXP Semiconductors NV closed at $64.13 yesterday.

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