Shares of ON Semiconductor Corporation’s (NASDAQ:ON) have been moving north backed by strong automotive, industrial and communications end-markets. The company has been expanding its product portfolio supported by inorganic growth strategies and successful integrations. However, increasing debt burden continues to erode margins amid stiff competition.
This Zacks Rank #3 (Hold) stock has returned 65.6% on a year-to-date basis, significantly outperforming the industry’s rally of 25.8%.
The company reported third-quarter 2017 GAAP earnings of 25 cents per share, much higher than the year-ago earnings of 2 cents per share. Earnings also increased 14% sequentially.
The company reported revenues of $1.39 billion, which surged 46% year over year and 4% from the previous quarter. The year-over-year growth was driven by strong demand and adoption of the company’s diversified product portfolio for automotive, industrial and communications end-markets. Management is particularly positive about the strong operating model followed by ON Semi.
ON Semiconductor Corporation Revenue (TTM)
ON Semiconductor Corporation Revenue (TTM) | ON Semiconductor Corporation Quote
In the last 60 days, fiscal 2017 estimates were revised upward, taking the Zacks Consensus Estimate up from $1.40 per share to $1.44 per share.
Valuation Looks Impressive
On the valuation front too, the stock looks attractive. The company currently trades at a forward P/E multiple of 14.68x, significantly lower than the Zacks industry’s average of 27x. The ratio, which is obtained by dividing a stock’s current market price with its historical or estimated earnings, measures how much an investor needs to shell out per dollar of earnings. Therefore, the lower the P/E of a stock, the better it is for a value investor.
Product Additions and Acquisitions - Key Catalysts
The company is quite active on the mergers and acquisitions front. Its acquisition of Cypress Semiconductor’s CMOS image sensor business unit, AMI Semiconductor and CMD have expanded its product breadth. These acquisitions have also given the company exposure to new end markets along with higher margin capabilities.
ON Semi’s automotive segment is a strong growth driver as evident from the strong booking trends in the last few quarters. Moreover, decreasing oil prices and attractive product offerings are further aiding revenues.
In view of rising product demand, ON Semi launched three image sensors for ADAS and real view applications alongside its low energy Bluetooth technology and Smart Passive Sensors (SPS). These will strengthen its Internet of Things (IoT) development kit platform’s capabilities. The product launches in the automotive end market for next generation automobile designs and the existing product portfolio will increase revenues for the business, going forward.
Additionally, management believes that Fairchild’s acquisition will be accretive to the company’s non-GAAP earnings and free cash flow and generate annual cost savings of at least $150 million. We believe that ON Semi can make the most of new socket opportunities through these acquisitions, thus recording top-line growth.
Debt Burden and Competition - Potent Threats
Fairchild’s acquisition has increased the company’s debt, which will continue to have an adverse impact on net earnings also increasing the overall risk profile of the company.
Additionally, ON Semi faces stiff competition from other integrated circuit manufacturers.
ON Semi’s acquisitions may have provided earnings increment but its impact on margins are doubtful. Also, frequent acquisitions are a source of distraction for management.
Zacks Rank &Stocks to Consider
Better-ranked stocks in the broader technology sector are NetApp, Inc (NASDAQ:NTAP) , NVIDIA Corporation (NASDAQ:NVDA) and Broadcom Limited (NASDAQ:AVGO) , all sporting a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.
NetApp, NVIDIA and Broadcom have a long-term expected EPS growth rate of 11.34%, 10.25% and 13.75%, respectively.
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