NXP Q1 2020– A steer

NXP hints at mobile, industrial and automotive outlook.

• NXP reported reasonable results but guided as weakly as expected showing both the well-documented weakness in automotive but also another hint of a slip in demand for mobile devices.
• Q1 2020 revenues / EBIT were $2.0bn / $502m compared to already adjusted estimates of $2.1bn / $532m.
• During the backend of the quarter, demand outside of China began to deteriorate meaningfully which is pretty much in line with what the rest of the sector has reported so far.
• This has been reflected in the guidance where revenues / EBIT of $1.8bn (midpoint) / LOSS$175m (midpoint) are forecast compared to consensus revenue of $1.8bn.
• During Q1 2020 automotive declined by 4% YoY while mobile and Industrial both increased by 2% YoY.
• None of these are particularly abnormal for the first quarter in any year and so it is the commentary around Q2 2020 that really matters.
• Here, the company is expecting an overall YoY decline in revenues of between 14% to 22%.
• NXP 2019 revenues were 47% from automotive with 13% from mobile and 18% from Industrial and IoT.
• The decline in revenues is going to be predominantly felt in the Automotive segment but it looks like Mobile has also been impacted.
• The real problem is that NXP has by its own admission very little visibility and so there is a significant possibility that reality is meaningfully outside of the range that the company has set.
• Hence, I continue to think that smartphone demand will be impacted and decline somewhere between 10% – 20% this year while automotive could be hit much harder.
  • Automotive
  • I think that while the short-term is particularly bad for automotive there is a possibility that it bounces back better than people think.
  • In the absence of a vaccine, people are going to be more wary of sharing assets such as taxis, ride-hailing and public transport leading to a potential jump in miles driven by private vehicles as well as an increase in ownership.
  • This is likely to be short-lived but should give the auto industry some badly needed relief.
  • Mobile
  • While 2020 is going to be a rough year, history has shown that lost sales in one year are often made up in subsequent years.
  • This means that it is all about the replacement rate.
  • In a recession where optimism is low and people feel worse off, they tend to delay replacing their mobile devices and use their existing devices for longer.
  • However, once the economy and consumer sentiment improve, the replacement rate tends to increase leading to a short-term bounce in growth before settling back to baseline.
• The real problem at the moment is that no one really knows what end demand has been like during the lockdown or how quickly it is going to come back as the economy struggles back to life.
• The economic data is pointing to a slow recovery meaning that economic contraction in 2020 and 2021 compared to 2019 are now distinctly possible.
• Against this backdrop, the market’s assumption that the economy is going instantly go back to the way it was is incomprehensible.
• Given the share price bounce and the subsequent cut to earnings, the PE ratio of the S&P500 is now at an all-time high at around 21x 2020 earnings (Bloomberg).
• This looks completely unsustainable to me which is why I remain very cautious on the market overall.