Three Strong Reasons To Buy NXP Stock After UBS Upgrade


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UBS has upgraded NXP semiconductors to Buy, raising the price target to $285 from the previous $275.The analysts have pointed out that despite outperforming its peers, the company continues to trade at a discount due to de-rating, making it an attractive buy even after the outperformance.NXP’s recent success has come on the back of operational efficiencies during the recent downturn, helping the company stay ahead of its peers.There is still considerable weakness though, as the automotive sector continues to weigh down on the company’s financials.It accounts for 56% of the company’s revenues, making recovery of the business hard without a recovery in the global automotive market.Despite the struggling automotive market, analysts at UBS see an upside in the stock, adding it to their buy recommendations.

Inventory and pricing support a 2025 recovery
UBS’s distributor tracker data shows that NXP management has done a good job with its inventory levels.Its micro-controller inventory stands in line with its long-term inventories despite a slow economy.Moreover, its pricing has stayed surprisingly resilient, allowing the company to maintain healthy cash flows heading into the next year.This also implies that the company can get rid of access inventory through lower pricing easily, without disturbing its recovery plans.

Shift to zonal/domain architecture
The switch to zonal/domain architecture also favors the company’s next year prospects, irrespective of how its end markets behave.The new zonal/domain architecture allows carmakers to pack more microcontroller units (MCUs) compared to cars with distributed designs.This uplift in revenue helps companies improve margins.In NXP’s case, this would help them grow their automotive revenues by high single digits CAGR over the next 3 years.This improvement therefore directly contributes to the company’s profitability without the need for improving market conditions.

Strong margin management during the downturn
As already mentioned, one of the reasons the company has outperformed its peers is its extraordinary management ensuring smooth operations in a troubled market.During the whole cycle from the peak to the trough, NXP’s margin contraction was only 50 basis points.Compare that to the industry average of 910 basis points and you will get why the company is poised for upside as the broader market heads towards recovery in the coming year.UBS also believes that in its upcoming event in November, the company could lift its 55%-58% gross margins target, giving the stock an immediate boost before heading into the next year.Investors may want to start taking a position in the stock before that event as the management will not waste any opportunity to boast about their performance at the event.To conclude, NXP’s management’s efforts in getting rid of its lower margin businesses, tremendous inventory management and operational efficiency, and improved technology make the stock the best candidate in the industry for outperformance in the coming upcycle.More By This Author:FS KKR Capital Stock Yields 14%; Is It A Good Investment?
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