BofA Upgrades NXP, Downgrades Microchip: A Semiconductor Pair Trade

It’s a stock picking game in the semiconductor space these days, and one analyst has upgraded one semiconductor stock and downgraded another.

The Analyst

Bank of America Merrill Lynch analyst Vivek Arya upgraded NXP Semiconductors NV NXPI from Neutral to Buy and raised the price target from $110 to $120. Arya downgraded Microchip Technology Inc. MCHP from Buy to Neutral and lowered the price target from $115 to $95.

The Thesis

NXP has a number of bullish catalysts working in its favor, including its new auto and Internet of Things products, its improved balance sheet, its 20-percent free cash flow growth and its aggressive stock buybacks, Arya said in a Monday note. (See the analyst's track record here.) 

Management is now re-engaged with the company after two years of QUALCOMM, Inc. QCOM buyout uncertainty, and Arya said a wave of insider buying is a good sign.

Microchip, on the other hand, has a troubling 5x leverage and is facing uncertainty involving integration of its recent Microsemi acquisition, the analyst said. The high debt burden will likely prevent any major capital returns in the near future, and Microsemi’s excess channel inventory could take a while to work through, he said. 

Overall, Arya is still bullish on microcontroller suppliers.

“NXPI and MCHP are among the top three suppliers of microcontrollers — one of our favorite product categories in semis, next to analog — with both exposed to secular drivers in advanced automotive, industrial and internet-of-things markets." 

Price Action

Microchip Technology stock was down 2.42 percent at $81.58 at the time of publication Monday, while NXP was down 2.36 percent at $90.57. 

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