Due to the declining sales of the iPhone 6S, shares of Apple (AAPL, Financial) and Apple suppliers have taken a beating over the last few months. While the decline is understandable, it is overdone, especially in the case of NXP Semiconductors (NXPI, Financial). The company has a diverse business, and investors are overestimating the threats posed by the declining iPhone sales. Investors should consider buying NXP Semiconductors on the pullback.
Synergies kicking in
NXP Semiconductors’ most recent quarterly results and first quarter guidance clearly signifies a drawback of pursuing a merger higher.Â
During the merger, forecasters were predicting pro-forma earnings of up to $8 this year and $11 by 2018. For 2016, the company failed to meet those expectations mainly due to the slowdown in premium smartphones sales as well as inventory buildup in significant distributors. However, it is necessary for stockholders keep those original goals in mind going forward.
NXP Semiconductor was not able to perform well in 2015, as the company observed declining growth in market share. Still, the company is on its way to significantly grow earnings in the next few years. The capability to recognize substantial synergies and pay down debt adds to bottom line. The synergies on its own will add approximately $1.50 per share, while the interest costs run an additional $1.00 per share.
Furthermore, NXP Semiconductors may even decide to go for stock buybacks to increase EPS bearing in mind the debt as an average cost lower than 4%.
Near field communication
NXP Semiconductors is suffering from declining demand in its each market, primarily due to macroeconomic ambiguity and higher level of channel inventory. At present, there are many companies that manufacture the equipment that goes inside wearable devices, but there are fewer companies that manufacture wearable devices. NXP Semiconductors accounts for the first category, which manufacture tech that are equipped inside wearable devices.
The company consists of several types of different technologies, but its near field communication chips, which it supplies to Apple for iPhone and Watch makes it a wearables player. The NFC chip is the most important part of Apple Pay, the company’s mobile payment system used at point-of-sale payment terminals.
Near field communication is likely to become more eminent in the wearable technology sector as other companies embrace it for their own payment systems. Major companies like Samsung and Alphabet’s (GOOG, Financial) (GOOGL, Financial) Google have their own mobile payment systems, but already wearable payments are just about to launch soon.
Conclusion
Following the 20% year-to-date drop, shares of NXP Semiconductors look undervalued. The stock is trading at 11 times trailing earnings and with the company’s earnings expected to grow in the future, I think the stock is dirt cheap. Investors should consider buying NXP Semiconductor on the pullback.
