Why NXP/Qualcomm Deal Makes Sense

 | Sep 30, 2016 | 4:10 PM EDT
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The following commentary was originally sent to Action Alerts PLUS subscribers on Sept. 30, 2016, at 1:58 p.m. ET.

Shares of NXP Semiconductors (NXPI) marched higher in today's session -- trading 30% above our around $79 cost basis -- following Wall Street Journal reports that Qualcomm (QCOM) is in talks to acquire the company over the next two to three months. We would never offer certainty around takeover speculation, but regardless of the outcome, we view the situation as a seminal moment for both NXP and its shareholders. The newfound attention on a previously overlooked name illuminates the tangible value underpinning NXP's business model. We reiterate the One rating and $110 price target held since initiating on the name earlier this year in the Action Alerts PLUS portfolio. 

Before we delve deeper, we want to offer members both analysis and reflection on a holding that we have been pounding the table on since unveiling our thesis on our first-quarter 2016 Chairman's Club conference call in late April -- and initiating in the portfolio the following week.

NXP is a lesson in conviction. We introduced it into the portfolio with $110 price target given: "1) the company's outsized market leadership across a diverse range of end markets (notably in autos, secure identification, and communications); 2) continued market share gains (based on a track record of growing 50% faster than the industry); 3) cost and revenue synergies driven by 2015 merger with Freescale; 4) industry-high free cash flow growth trajectory, 100% of which should be returned to shareholders; 5) relative undervaluation."

Our thesis is unchanged, and empowered by the company's recent results. For a full redux of why we love NXP, refer to our white paper two months back, which provided context and strategic insight into how the company has quietly created $30 billion in value since its 2010 IPO at $14 a share.

NXPI has been our top-ranked value stock each month since introducing it into the portfolio. Importantly, we have maintained our high conviction even in times of doubt, adding the name (and recommending when we were restricted) multiple times below $80 -- notably in the mid-$70s, post-Brexit.

As it relates to the potential takeover, we expect negotiations to be rigorous and would be surprised to see NXPI accept a bid under $115 a share. Although Qualcomm's management team would likely come in at a low offer -- we have heard reports of $95 -- the reality is Qualcomm needs NXP more than NXP needs Qualcomm. While it is normal to see the takeover target spike (NXPI is up 27% since reports), a double-digit rally in shares of the potential acquirer (QCOM is up 11% since reports) is as rare as it is powerful.

In plain English, Qualcomm shareholders are telling management to get the deal done. The strategic fit could not be clearer: NXP represents a rare opportunity for the lumbering Qualcomm to transform its business model, diversify away from the low-margin, low-growth smartphone market and towards high-margin, high-growth, highly lucrative end markets across auto, secured devices, connectivity and secure payments. 

Note: When I spoke at the San Francisco MoneyShow in August, I highlighted my favorite three stocks for the long term, with NXP topping the list.

On Oct. 20, I will be presenting at The MoneyShow Dallas and intend to share my new top three investment ideas within the Action Alerts PLUS portfolio. 

NXP has certainly been a great success for the portfolio and all the members who invested alongside us amid doubt, panic, fear and anxiety. For this reason, during my session - "Investing Jim Cramer's Money: Mistakes, Successes and Humility" -- I will be sharing not only my successes but more importantly my mistakes, discussing my experience working alongside the former hedge fund manager and host of Mad Money on a day-to-day basis, using my own mistakes as teaching lessons to inform future decisions. 

Be my guest (click here to register to secure a free spot) at The MoneyShow Dallas and discover important insights and actionable recommendations that will help you turn investment potential into long-term success. 

The three-day event (Oct. 19-21) is a great opportunity to meet top experts and identify the best investment opportunities in today's challenging market conditions. I will be joining over 50 eminent economists, top-performing money managers and successful professional traders at the show. Attendees will be exposed to a variety of ways to look at the markets, discover new methods of reading charts and find new opportunities you may have missed in the past. Details below: 

The MoneyShow Dallas
Oct. 19-21 ' Hyatt Regency Dallas
Invest Smarter, Trade Wiser 

Secure your free pass:

Click here to register online or call 800-970-4355 (make sure to mention priority code 041945).

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