Morgan Stanley: Time To Buy NXP Semiconductor

• The share price of NXP Semiconductors NV NXPI has increased by 15.53 percent year-to-date, hitting a high of $112.25 on May 29.
• Morgan Stanley’s Craig Hettenbach has reinitiated coverage of the company with an Overweight rating and price target of $115.
• Hettenbach expects the stock to outperform going forward, driven by the robust 20 percent EPS growth estimated for the company and any multiple expansion only adding to the gains.

Analyst Craig Hettenbach recommends that any volatility associated with weak fundamentals of the semiconductor industry, including the apparent risk to the company’s Q4 performance, should be used to build a position in NXP Semiconductors, ahead of the Freescale Semiconductor Ltd. FSL deal being closed.

While there have been concerns regarding NXP Semiconductors’ exposure to Apple Inc. AAPL, Hettenbach expects the Freescale acquisition to reduce this exposure by half.

NXP Semiconductors’ revenue is expected to grow at an above industry level of 6 percent CAGR over the next few years, while the company’s core business is likely to continue to grow at twice the rate of its peers, driven by “its strong leadership in a number of secular growth themes, including rising penetration of mobile payments, transition to chip based payment cards in the US and China and continued digitization of government documents.”

Hettenbach expects the company’s to help accelerate the margin expansion that is already taking place at Freescale by about 10 percentage points, as cost synergies are realized.

NXP Semiconductor is expected to report in-line results for Q3, although with revenue growth ahead of that of its peers for Q4 and 2015.

“We stress that there are risks to Q4 estimates for NXP, although the company likely protects EPS better than peers in this difficult macro environment,” Hettenbach added.