Why Citi Is Neutral On Qualcomm, NXP Semi Ahead Of Deal Closing

Citi analysts have initiated coverage of QUALCOMM, Inc. QCOM with a Neutral rating and $70 price target, saying the business faces secular headwinds and integration issues from the NXP Semiconductors NV NXPI acquisition.

Qalcomm At Neutral, $70 PT

The analysts noted that Qualcomm’s chipset business will face tough competition from low-cost rivals such as Intel Corporation INTC and Mediatek, while total available market would shrink as customers offer their own processors.

Though operating margins for Qualcomm’s licensing business remain high at roughly 86 percent, Citi expects revenue growth to remain low at 2 percent over the next couple of years given falling royalty rates/ASPs.

Furthermore, Citi believes Qualcomm’s long-term chipset operating margin target and 2020 licensing revenue targets are aggressive.

On the NXP deal, Citi said though the acquisition could eventually boost EPS by roughly 34 percent or $1.55, it expects “accretion from NXP will be lumpy and fraught with integration risks.”

NXP Semi At Neutral, PT Of $105

Citi also launched coverage of NXP Semi with a Neutral rating, with a price target of $105, a $5 discount from the takeout price of $110.

“Although the takeout price of $110.00 represents a 13 percent premium to NXP current stock price, we believe it should trade at a discount given it’s a year until close,” the analysts wrote in a note.

Importantly, Citi estimates NXP’s automotive/industrial business to grow 0 percent in 2016, below the industry growth of 3.5 percent despite its 66 percent exposure to the two highest-growth end markets in semis (automotive and industrial).

“We expect NXP to grow revenue at a 3 percent CAGR over the next two years, below the company’s revenue growth target of 5–7 percent and industry growth of mid-single digits, due to Freescale (roughly 45 percent of NXP revenue) sales growth of 2 percent,” the analysts added.

Shares of Qualcomm closed Tuesday’s trading at $66.91. In the pre-market hours Wednesday, they gained 1.94 percent to $68.21. NXP closed Tuesday’s session at $97.10.