Semiconductor stocks made iStock's i On the Market's Weekly Sector Performance Review bullish list for the past few weeks; so, it is no surprise to see semi names being upgraded by Wall Street analysts.
Earlier today, Morgan Stanley upgraded NXP Semiconductors NV (NASDAQ:NXPI) to an "Overweight" from an "Equal-weight" rating. Shares of the Netherlands based, broadline chip-makers are up more than 3% on the news, but still have 19.03% more to climb to hit Morgan's new $70 price-target.
NXP provides high performance mixed signal and standard product solutions for radio frequency (RF), analog, power management, interface, security, and digital processing products worldwide. The company operates through two segments, High Performance Mixed Signal and Standard Products.
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The wirehouse research firm says they upped their view because of "Increased conviction in the company's ID business—both core and emerging—following discussions with many companies in the ID ecosystem. Our conversations with OEM partners and competitors underscored NXP's strong competitive position in e-Government, Banking and embedded secure element. Highlights include the company's broad portfolio of secure Microcontrollers (MCUs), R&D scale/leverage due to technology reuse across different markets and entrenched relationships with customers."
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Morgan Stanley continued, "Additionally, we now have greater confidence on the significant growth potential for NXP's identification business as penetration in markets such as Banking and NFC are low. Importantly, our conversations with investors point to many unanswered questions in ID, suggesting room for additional buy-in to NXPI."
As it is today, analysts expect NXPI's earnings to grow by 26.70% this year and 13.20% next year while averaging 35.85% during the next half-decade. The consensus EPS estimate for 2014 is $4.17 and $4.72 for 2015.
Historically, the chip-maker has traded with an elevated price-to-earnings (P/E) ratio. The average P/E in the last five-years is 47.82. That would put the stock close to $200 – not going to happen. To trade at Morgan Stanley's $70 target requires a P/E of 16.78 for 2014's consensus and 14.83 for 2015, both are more in-line with the semiconductor peer group.
Perhaps, a better way to price NXPI is on a price-to-sales (P/S) basis. Since 2009, NXP Semiconductors traded at an average of 1.51 times sales compared to today's P/S ratio of 3.11, which is this l—l close to the half-decade high of 3.18.
The current consensus revenue outlook for this year is $5.28 billion and $5.66 billion for next year. To make $70, NXPI needs to trade at 3.34 times '14's sales outlook and with a P/S ratio of 3.11 for '15's projected top-line.
Overall: NXP Semiconductors NV (NASDAQ:NXPI) earnings and previous P/E history support $70. However, NXPI needs to maintain a higher than usual P/S ratio compared to its history and the industry average to hit $70. In our opinion, $70 is possible, but upside beyond there could be limited.
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