Target Breach Could Be Eventual Positive For NXP Semiconductors NV

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Sterne Agee analyst Vijay Rakesh rates NXP Semiconductors NV (NASDAQ:NXPI) as a Buy as he provides takeaways from the first Senate hearings after the Target Corporation (NYSE:TGT) breach on safeguarding consumers’ financial data and panel’s agreement that transaction infrastructure needs an upgrade to EMV/Chip & Pin.

The U.S. Senate hosted a hearing of a panel of industry experts today to discuss the role of banks, retailers, and government in the role of protecting consumer data and securing transactions. The key focus was on the U.S.’ “outdated credit and debit card technologies.” The panel unanimously agreed that our transaction infrastructure needs an upgrade and that “Chip & Pin” (or EMV as we know it) is the preferred delivery mechanism. We would note the Target Corporation (NYSE:TGT) CFO presents at another Senate hearing tomorrow (2/4). Positive for NXP Semiconductors NV (NASDAQ:NXPI).

Key takeaways from Senate hearing after Target breach

We believe some key takeaways from the U.S. Senate hearing today on safeguarding consumers’ financial data were:

The U.S. accounted for 30% of fraudulent card charges but ~47% of dollar losses globally. But POS fraud is down ~70% in Europe since the adoption of Chip & Pin.

The executive panel and Congress were in full agreement of adoption of Chip & Pin. It was noted that card associations have told retailers they are not allowed to deny a sale to a consumer based on a signature that doesn’t match the signature on the back of their card. But it is also a violation of standards to ask for additional ID at the point of sale. This is key as the magnetic strip and signature are rendered essentially useless. Chip and Pin adds a significant layer of protection to any credit card.

The cost to replace a standard credit card after a breach has occurred is ~$5. We would note that in the case of Target, $5 per card times 110M compromised cards is ~$550M in physical card replacement damages alone, not including transaction cost, monitoring costs, and personal data breaches.

The hearing also focused on the need for a shared responsibility among banks, retailers, and government. Banks shoulder the brunt of all losses: banks shoulder ~60% of reported card losses but only account for 8% of fraud losses.

There was discussion on convergence among credit and debit card standards, and that the panel believed debit card safety should be just as important as credit card safety, another potential tailwind for EMV Chip & Pin. The October 2015 timeline is still very much a reality and many banks and retailers are moving toward this.

There are more hearings tomorrow regarding the recent merchant data breaches, with the Target Corporation (NYSE:TGT) CFO John Mulligan speaking tomorrow at a hearing before the Senate Committee.

Estimates for NXP Semiconductors

The continued push toward Chip & Pin / EMV is an incremental positive for NXP Semiconductors NV (NASDAQ:NXPI). We are not making changes to our estimates at this time. Our C14E is $5.39B/$4.29; C15E is $5.8B/$4.68, Reiterating our Buy-$52PT.

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