On Tuesday, B.Riley adjusted its outlook on ON Semiconductor (NASDAQ:ON), reducing the company's price target from $106.00 to $100.00 while maintaining a Buy rating. The firm's analysis followed ON Semiconductor's third-quarter earnings report, which surpassed consensus expectations. However, the company's fourth-quarter guidance was slightly lower, attributed to weaker automotive industry unit sales and traditional industrial demand.
The analyst noted that despite the softer near-term automotive outlook, ON Semiconductor's new Automotive Silicon Carbide (SiC) programs are progressing as planned. Additionally, the company is experiencing growth in secular industrial markets, including solar and data centers. The firm also highlighted ON Semiconductor's operational efficiencies, such as cost of goods sold (COGS) improvements, operational expenditures, cash flow, and cash returns, as indicators of the company's strong performance during economic troughs.
ON Semiconductor's stock performance year-to-date before the third-quarter earnings release was discussed, with a 15% decline compared to the Semiconductor Index's (SOX) 25% increase and the average 14% gain of its large-cap Analog & Interface (NASDAQ:TILE) (A&I)-levered peers. The analyst pointed out that this underperformance, along with a forward two-year consensus price-to-earnings (P/E) ratio of 15.3x, presents a "Buy the dip" opportunity.
The market's reaction to ON Semiconductor's earnings call was initially positive, with shares trading up by 3%. However, the sentiment shifted to a 4% drop during the call due to revised expectations for the second half of 2024 in the Auto SiC segment. The stock later recovered to a slight gain as the company's automotive market share and new programs appeared to remain on course.
B.Riley's revised revenue and EPS estimates for ON Semiconductor extend into 2027, taking into account the company's long-term gross margin targets of 53.0%. Although the price target was lowered to $100, the firm maintains a 33% upside potential over the next 12 months, reaffirming its Buy rating.
The report concluded with perspectives from both bears, who may see potential intensification of SiC headwinds, and bulls, who are encouraged by new customer onboarding and manufacturing options, as well as the company's potential in Advanced Driver-Assistance Systems (ADAS) leading up to the model year 2027 safety standard upgrades in the US and Europe.
In other recent news, ON Semiconductor has had a series of developments. The company reported robust third-quarter results for 2024, surpassing expectations due to the strength in the China electric vehicle market and sustained demand in certain industrial sectors. The semiconductor company's involvement in areas such as silicon carbide for electric vehicles and CMOS image sensors for Advanced Driver Assistance Systems has been highlighted by Goldman Sachs, which has increased the stock's price target to $92.00.
Simultaneously, Truist Securities lowered its price target for ON Semiconductor to $89.00 but maintained a Buy rating. The firm noted that despite a revision in the company's Silicon Carbide growth outlook, ON Semiconductor is still on track to deliver double-digit earnings per share growth throughout a business cycle due to considerable operating leverage.
On the earnings front, ON Semiconductor reported a slight revenue increase to $1.76 billion, marking a 2% sequential growth. The company's commitment to operational excellence was demonstrated with a 41% sequential rise in free cash flow, returning 75% of this flow to shareholders. For the fourth quarter, the company projects revenue to be between $1.71 billion and $1.81 billion, with non-GAAP gross margins of 44% to 46%. Despite the expectation of flat revenue, an increase in automotive sales in the low to mid-single digits is anticipated.
InvestingPro Insights
To complement B.Riley's analysis of ON Semiconductor (NASDAQ:ON), recent data from InvestingPro offers additional context. The company's market capitalization stands at $30.76 billion, with a P/E ratio of 17.66, reflecting the market's current valuation of the stock.
InvestingPro Tips highlight ON Semiconductor's position as a prominent player in the Semiconductors & Semiconductor Equipment industry, aligning with the article's focus on the company's automotive and industrial market segments. The stock has shown a significant return over the last week, with InvestingPro data indicating a 1-week price total return of 8.57%. This recent uptick is particularly interesting given the article's mention of the stock's initial positive reaction to the earnings call.
Another relevant InvestingPro Tip notes that analysts anticipate a sales decline in the current year, which corresponds with the article's discussion of softer near-term automotive outlook and weaker traditional industrial demand. This expectation is further supported by the InvestingPro data showing a revenue growth of -6.63% over the last twelve months as of Q2 2024.
For investors seeking a more comprehensive analysis, InvestingPro offers 11 additional tips for ON Semiconductor, providing a broader perspective on the company's financial health and market position.
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