ON Semiconductor (NASDAQ:ON) is outperforming the semiconductor (NASDAQ:SOXX) industry by 260 percentage points in the post-pandemic world, and that is no surprise. The company’s focus on intelligent sensing and power solutions makes it a valuable partner for industrial purposes and IT infrastructure alike.
Auto manufacturers use the company’s products for EV and self-driving car applications, and there is a high demand for industrial and storage purposes too. With others in the arena reporting better than expected results, it looks like a rebound in the sector is brewing that could propel ON Semiconductor to new highs.
ON Semiconductor Is A Value, But It’s Missing One Thing
Trading at 12.55X its earnings, it is a value compared to other high-demand chip stocks like NVIDIA (NASDAQ:NVDA), Advanced Micro Devices (NASDAQ:AMD), and Marvell (NASDAQ:MRVL) but it is lacking something despite more fairly-valued brethren possess. A dividend. Qualcomm (NASDAQ:QCOM), Broadcom (NASDAQ:AVGO), and Taiwan Semiconductor Manufacturing (NYSE:TSM) all pay at least 1.9% in yield, and the highest yielding Intel (NASDAQ:INTC) pays close to 4%. In this light, ON Semiconductor may not be the best buy, but some details may sway the decision back in its favor.
ON Semiconductor Has Record-Setting Quarter, Shares Falter
ON Semiconductor had a great quarter with double-digit growth in all segments. The company reported a record $2.09 billion in revenue for a growth of 25.1% over last year that beat the Marketbeat.com consensus by 390 basis points. A 44% gain drove the strength in the ISG segment that was balanced by slower 25% growth in the PSG segment and 18% growth in the ASG segment. The real takeaway is the company’s ability to leverage scale, as seen in the bottom line results.
The company reports a record gross margin of 49.7% that drove quadruple-digit gains in the operating margin. The operating margin improved by 1110 bps on a GAAP basis and 1480 bps on an adjusted basis for a record 34.5% in adjusted earnings. This performance resulted in $1.02 in GAAP earnings, up 142% YOY versus the 25% gain in revenue and a 63% increase in adjusted EPS, which beat consensus by 630 basis points. Looking forward, the company expects the momentum to carry into the 3rd quarter at least and has raised the guidance. ON Semiconductor is now expecting revenue and earnings in a range above the pre-earnings consensus, and there is an upside risk in the outlook.
“These financial results validate our momentum in the market and the differentiation of our intelligent power and sensing solutions. Our leadership in the accelerating megatrends of vehicle electrification, ADAS, energy infrastructure, and factory automation have enabled us to extend long-term supply agreements and increase demand visibility. While we are optimistic about our outlook, we remain sensitive to dynamic market conditions,” said Hassane El-Khoury, CEO of ON Semiconductor.
ON Semiconductor Repurchases Stock
ON Semiconductor doesn’t pay a dividend but has begun repurchasing stock, which bodes well for the capital return outlook. The company has $89.7 million in repurchases on the Cash Flow Statement, which is a small 0.3% of the current market but more than the 0% purchased last year in the 2nd quarter. Add in the fact that cash flows and balances are growing, and the odds of ON Semiconductor initiating a dividend grow, which is a catalyst for higher share prices.
The Technical Outlook: ON Semiconductor Steadies After Record Results
Shares of ON Semiconductor fell in the wake of the earnings report but may have already found support. The price action bounced from a near-term support level and is now edging higher despite resistance at the top of a trading range. Resistance is at or near the $67.50 level, which has provided resistance several times over the past year. If the market can get above $67.50, a rally may ensue. If not, this stock will remain range bound until the fundamental outlook changes.
