Forget electric vehicles: these 3 actions are a better way to play auto recovery
The auto industry has had a tough time in recent years. After a mini-recession resulting from the trade war between the United States and China, auto sales fell 1.4% last year, the COVID-19 pandemic has significantly reduced sales this year, people being quarantined and unable to visit dealerships.
Yet as people continue to avoid mass transit or transit companies, Americans seem to be turning back to owning their own cars, whether used or new. After April auto sales were halved from pre-COVID levels in February, auto sales rebounded and nearly returned to pre-COVID levels in August.
Nonetheless, many automakers still face significant challenges, especially as the world turns to electric vehicles at an accelerating pace. That is why the best way to play an automotive recovery may not be with the automakers themselves, but rather these high-tech suppliers.
Self-focused semiconductor sets
Even if a newly manufactured car or truck is not self-sufficient, the newer features of the car increasingly require semiconductor content. Advanced Driver Assistance Systems (ADAS), electrification, interactive displays and other technological safety measures are adopted year by year, and as cars progress from Level 1 to Level 4 driving self-sustaining over the next decade, these trends will only accelerate. .
This is why the best way to play a recovery in cars may come from autofocus. semiconductor companies, which will get not only an increase in the number of automatic units moved, but also a “double increase” in the increased content per vehicle.
This is why the autofocus semiconductor actions NXP semiconductors (NXPI), ON Semiconductors (NASDAQ: ON), and Texas instruments (NASDAQ: TXN) each one looks like very promising ways to play the AutoRecover that has just started.
NXP Semiconductors Announces Positive Earnings Surprise
The first is NXP Semiconductors, which has perhaps the greatest exposure to the automotive industry of any semiconductor company. In 2019, 47% of NXP’s sales went to the auto industry – and remember, it was a year of decline for automobiles. NXP complements the rest of the sales with secure ID chips for mobile payments, Internet of Things devices, Wi-Fi, and RF power solutions.
Things are looking up for NXP as the company just announced third quarter results that were better than its previous forecast. The company now estimates that sales will reach $ 2.27 billion, up from $ 2 billion previously, with adjustments (noGAAP) operating income of $ 586 million compared to previous guidance of $ 444 million. Management said:
[W]We saw a significant improvement in demand in all end markets, but particularly in the Automotive and Mobile end markets. In addition, demand has improved in our direct and distribution channels. The business environment improved at a faster rate than expected, resulting in a general increase in revenues, which also allowed an increase in gross margin.
Look for good times to keep going if the auto market continues to rise; Meanwhile, NXP’s other markets are also expected to continue to grow over the next decade.
ON Semiconductors Has Big Auto Show And Newly Invested Activist Investor
A second autofocus semiconductor company is ON Semiconductor. ON is a relatively small semiconductor company with a market capitalization of just $ 10.9 billion. It has also fallen behind many other similar semi-companies in the recent past, making it a target for value investors.
In fact, activist investor Jeff Smith’s Starboard Value Fund has just taken a stand in the company and has charted a clear path for improvement. The starboard plan involves asking ON to decommission its in-house manufacturing plants and outsource most of the production to a third-party foundry. Running your own manufacturing can have some advantages, but when times get tough, the high fixed costs of operating a factory can result in lower margins and require higher capital expenditures. In Starboard’s eyes, other peers who have switched to a “fab-lite” model enjoy more headroom and flexibility in down cycles, which we just had. Starboard believes that such a move would not only lead to increased margins and profits, but would also earn ON Semi an increase in valuation from investors, which would lead to a “double tap” effect which should lead to an increase in valuation from investors. rising share price.
Better yet, ON has a solid long-term outlook, fueled by 33% exposure to automobiles, its largest end market. The good news is that as vehicles move from yesterday’s “standard” functionality to Level 2 range, ON content per vehicle increases 15 times, from $ 10 to $ 150. And for Level 4 vehicles with fully autonomous capabilities, but the ability for the driver to still intervene, ON content could reach $ 1,000 per vehicle.
The prospect of improved end markets and enterprise level improvements that Starboard seeks could mean good things for ON shareholders in the years to come.
Texas Instruments: A blue chip that keeps increasing its dividend
Finally, one of the largest and oldest blue chip semiconductor companies also has a strong presence in the automotive market: Texas Instruments. It is a large and diverse semiconductor company that operates in a broader spectrum of industries than any of its peers.
Yet for such a diverse chipmaker, 21% of sales were still destined for the automotive market in 2019, reflecting a multi-year strategic decision to focus on analog chips and on-board processors for the automotive segment. The company’s wide array of autofocus chips allow Texas Instruments to take advantage of the increase in automatic electronization during this decade.
Despite an industrial recession last year and the pandemic in the first half of 2020, the reliable Texas Instruments still managed to generate $ 5.7 billion in free cash flow for the 12 months ended in June, allowing the company to continue to buy back shares and pay its dividend even in difficult times. In fact, the company just increased its dividend by 13% in September and is now earning 2.75%.
Texas Instruments’ scale and record of capital allocation make it the rare semiconductor stock that technology investors can buy and hold without worry for decades. This 2.75% yield isn’t too shabby in a world of zero interest rates, and since this payout is virtually guaranteed to increase in the future, dividend-growing investors would be hard pressed to find a better risk-return ratio than TI today, especially as the automotive market is recovering.
This article represents the opinion of the author, who may disagree with the “official” recommendation position of a premium Motley Fool consulting service. We are motley! Challenging an investment thesis – even one of our own – helps us all to think critically about investing and make decisions that help us become smarter, happier, and richer.