NXP Semi Zig Zags, Ford and GM Await NAFTA and more…
I always spend more time worrying about the positions that move against us than those that are working. Last week was a particularly rough week. Almost all of our options positions moved sharply against us.
Ford (NYSE: F) and General Motors (NYSE: GM) slipped as investors worried a NAFTA deal would be delayed even longer. Then NXP Semiconductors (NSDQ: NXPI), which I expected to jump on its Analysts’ Day, got clobbered by a Sell recommendation.
To add icing to the cake, The Chemours (NYSE: CC) slid on news that pricing for its most profitable product is due to fall.
Calgon, take me away.
Of course, there’s not much to do when a stock isn’t working as predicted but to gather as much information as possible and reassess. I’ve done just that and feel comfortable with our positions. I am most worried about The Chemours, which behaves incredibly badly even when the news is favorable.
You likely saw the new bearish trade I suggested today on Allergan (NYSE: AGN). The options only briefly traded below my buy limit price and likely before most of you received the alert. I suggest being patient for now.
I had the trade teed up for last week but foolishly waited until after the company hosted an event for analysts. The news of Teva receiving approval for a competing migraine drug was unexpected and is likely the reason for the heavy selling today. Let’s hope some sell-side bull steps up and gets the stock back up so we can execute these puts at a reasonable price.
Around the Portfolio:
AbbVie (NYSE: ABBV) announced FDA approval for a label expansion for its cancer drug VENCLEXTA. The drug can now be used in combination with rituximab to treat a larger patient population.
AGCO Corp. (NYSE: AGCO): The monthly government grain inventory and production report due mid-month may weigh on AGCO. Recent months showed increased soybean inventory levels as production outstripped demand due to tariffs.
I thought last week that the stock might drop on its presentation at Morgan Stanley on September 13. This was due to investors acknowledging the possibility that the company’s recent acquisition of Precision Planting might not be going according to plan. In reviewing prior transcripts I found this gem from CFO Andrew Beck:
Andrew H. Beck, AGCO Corporation – Senior VP & CFO 
“Well, we — you were focused on organic growth, but we had a large acquisition, impactful acquisition, Precision Planting that’s helping our North America results a lot here in the first 3 quarters of the year. And then in the fourth quarter, we won’t get that favorable comp anymore because we got their business for Q4 last year. So that comes out of the numbers. And then also as we commented many times, we are still working our dealer inventories down in North America, and we expect some of that impact to be more second half of the year where we’re moving the dealer inventories down and our retails will be higher than our wholesales in the second half.”
This language indicates to me that the purchased business has too much inventory in the channel. Investors have not been able to compare growth rates for the acquired business yet but can do so once they loop around the purchase date.
The stock did indeed drop a hair but not due to any discussion regarding the acquisition. I reviewed the transcript in which the company was only asked “softball” questions. However, CFO Andrew Beck did admit that dealer inventories are higher than desirable.
The Chemours Company continues to get slammed. This time it was due to an industry report warning that prices for TiO2, one of CC’s fastest-growing products, may fall. The report focuses on generic commodity-like versions of this chemical. The note specifically mentions that many Chinese competitors are trying to improve the quality of their product to avoid the lower prices.
Based on my research, CC’s product is at the high end of quality and pricing. Management recently noted that they did not see any excess supply of similar product hitting the market. The following comments are from the company’s August presentation at a Jefferies conference:
“Yes, so coming back to our TiO2 business. First of all, we love all of our businesses and we just are blessed with a great portfolio of very profitable businesses. TiO2, as you know, in our last quarter was a 34% EBITDA margin business. It’s a great business and throws off a ton of free cash flow. Sitting here today, we really like the structure of the markets in which we participate. There is good global growth as we sit here today. And there is no really significant new supply that we can see coming to market in the foreseeable future. And certainly, no meaningful supply in the segments and the quality spectrum in which we participate in the markets.”
Obviously, the market is not paying very much attention to these comments but I continue to believe the company is well positioned. Yet I am not oblivious to the stock move and deciding on how to handle the $49 calls which expire in October.
General Motors, where we own calls, may trade higher due to positive comments from RBC analyst Joseph Spak. Spak noted the valuation reflects ‘low expectations’, adding that while investors are focused on China and the direction of earnings in FY19, he believes that the market expectations are already “very low” with a forward valuation multiple ex-Cruise and ex-cash at just over 3.5-times earnings. He kept his Outperform rating and $49 price target on the stock after meeting with management.
NXP Semiconductors zig-zagged last week. It dropped precipitously after its September 11 Analysts’ Day. The stock was downgraded to a Sell by Stifel after the meeting.
The Stifel analyst noted a fear that the company would take on too much debt in the process of buying back stock. I don’t have access to the details of his report, but NXPI reduced its debt by $3.9 billion since the start of 2017. It will receive $2 billion in a breakup fee from Qualcomm. Part of that fee is used for buybacks and part will be funded by cash from operations and perhaps some debt.
I am confused by the analyst’s draconian downgrade as the company’s target leverage ratio (the amount of debt versus cash being generated) is 1.6x, a pretty low level.
Then the stock was then upgraded to Buy from Neutral at BofA/Merrill Lynch and had its target raised from $111 to $114 at Cowen. I expect the stock to jolt around a bit as its investor base transitions to new holders excited about the company’s prospects in the autonomous driving market.