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Target, NXP/Qualcomm, Chip Stocks, and More – Monster Week In Review

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Target, NXP/Qualcomm, Chip Stocks, and More – Monster Week In Review

Mott Capital Management, Michael Kramer

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It was another record-setting week for the stock market, as the S&P 500 finished the week at 2,810.  Target ($TGT) shares continue to soar, now up by nearly 20 percent. Meanwhile, the chipmaker stocks have come roaring back to life after being left for dead at the end of 2017. Plus, we take a look at the Qualcomm ($QCOM)/NXP ($NXPI) deal, and how much Qualcomm may have to pay up, which could be as much $155 to get the NXP deal done.

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Broader Stock Market

Consumer Discretionary stocks ($XLY) continue to lead the charge higher in 2018, now up by over 7 percent, just beating out the healthcare ($XLV) names, which are up by 6.97 percent.  The S&P 500 is now up by just over 5 percent. Utility stocks continue as the worse performing group, down by over 5 percent, and with yields continuing to rise, and the 10-year likely on its way back to 3 percent, utilities, and the consumer staples should continue to have a rough year.

^SPX Chart

^SPX data by YCharts

Out of the top 25 holdings in the SPDR S&P 500 ETF ($SPY), only 4 are down, AT&T ($T), Intel ($INTC), Verizon ($VZ), and Procter & Gamble ($PG).

Top Performing Stocks

Target

Within discretionary stocks, Target continues to run, now up nearly 20 percent on the year, followed by Netflix ($NFLX), Lowes ($LOW), and Amazon ($AMZN), all up by more than 10 percent.

consumer discretionary stocks

Despite the sharp rise in Target’s shares this year, keep in mind the past three years have been horrible for the stock, and part of the reason we have seen the stock rise so sharply in 2018, is due to expectations that revenues will continue to recover. It would suggest that any slip up in this development could be problematic for the stock price.

The chart below shows the relationship between Targets trailing-twelve-month revenue and the stock price. Revenue estimates show how expectations are for them to return to the previous highs over the next two years.

TGT Chart

TGT data by YCharts

Additionally, Target has historically had a high effective tax rate, as well as improving revenue expectations, the market is looking for a boost to the company’s earnings from tax savings.

TGT Effective Tax Rate (Quarterly) Chart

TGT Effective Tax Rate (Quarterly) data by YCharts

As long as Target’s business continues to see a revenue recover, the stock should continue to flourish.


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Chipmaker Stocks

We haven’t focused much on the chipmaker stock much this year, but after having a rough finish to 2017, the sector is moving higher once again, with the PHLX Semiconductor ETF ($SOXX) up nearly 10 percent in 2018, with a new group of leaders emerging. 2017 saw Micron ($MU), Nvidia and the Apple supplier lead the group higher, this year it has been AMD ($AMD), ON Semi ($ON), Nvidia ($NVDA), ASML ($ASML) and Cypress ($CY), and notice how the Apple suppliers Broadcom ($AVGO), Skyworks ($SWKS), and Qrovo ($QRVO) have fallen to the bottom.

 

chipmaker stocks

ASML reported solid results just this past week, beating earnings estimates by over 40 percent, and revenue estimates by nearly 20 percent, according to Ycharts. Which also helped to lift shares of Lam Research ($LRCX), MKS Instruments ($MKSI), and Applied Materials ($AMAT) higher too.

ASML Chart

ASML data by YCharts

So apparently a rotation has started occurring to this point in 2018, out of the Apple suppliers into chip equipment suppliers, for now at least.

NXP and Qualcomm Should Start Heating Up

NXP and Qualcomm have finally received EU approval for the proposed deal, and with shares of NXP trading at over $120, Qualcomm faces a dilemma, pay up or be acquired by Broadcom.

I have said this for months, but Qualcomm needs NXP badly. Qualcomm’s battle with Apple shows just how fragile their licensing business is, and how badly it’s revenue streams needs diversification NXP offers Qualcomm that and would make Qualcomm an immediate force in near-field communication and the auto market.

Broadcom to this point has been very aggressive in its attempts at taking over Qualcomm, and I’d suspect should the NXP deal fall through, they will get even more aggressive.

Wall Street is forecasting no revenue growth for Qualcomm over the next three years, and that undoubtedly does not strengthen Qualcomm’s case to stay independent.

QCOM Revenue (TTM) Chart

QCOM Revenue (TTM) data by YCharts

At $120, NXP is now trading at only 15 times 2019 estimates of $7.98, while Qualcomm is trading at 15.10 times estimates of $4.25. You can see that Qualcomm is not even paying a premium for NXP at this point, and even a modest 30 percent premium get’s NXP to 19.5 times 2019 estimates or a price of $155. A 30 percent premium to Broadcom’s forward multiple of 13, gets NXP’s share price to $135.

NXPI PE Ratio (Forward 1y) Chart

NXPI PE Ratio (Forward 1y) data by YCharts

Qualcomm finds itself in an awkward spot for sure. Qualcomm can threaten to cancel the deal with NXP, but then they would have to pay a $2 billion breakup fee and likely have Hock Tan and Broadcom just gobble them up.

That is it!

Tomorrow, a look at the week and earnings to come.

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Michael Kramer and the clients of Mott Capial own shares of SWKS, NXPI, VZ, NFLX

Mott Capital Management, LLC is a registered investment adviser. Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and unless otherwise stated, are not guaranteed. Be sure to first consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein. Upon request, the advisor will provide a list of all recommendations made during the past twelve months. Past performance is not indicative of future.

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Tags: #sp500 #target #chipmakers #NXP #Qualcomm #broadcom 

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