On Monday, Truist Securities adjusted its stance on ON Semiconductor (NASDAQ: NASDAQ:ON), reducing the price target from the previous $97.00 to $89.00. Despite this change, the firm has kept its Buy rating on the stock.
ON Semiconductor reported a slight beat in its third-quarter earnings compared to consensus estimates, but its fourth-quarter guidance was slightly below expectations. The company shared a variety of updates, which according to Truist Securities, are not expected to significantly shift market perspectives.
The analyst noted that ON Semiconductor has revised its Silicon Carbide (SiC) growth outlook, suggesting that even if sales growth is at half of the company's long-term target, approximately 5-6% instead of 10-12%, the company is still on track to deliver double-digit earnings per share growth throughout a business cycle. This is attributed to considerable operating leverage, with operating profit margin expected to rise from around 30% to about 40%.
Furthermore, the analyst pointed out that ON Semiconductor's stock is currently valued at a price-to-earnings (P/E) ratio of 16 times, which is significantly lower than that of comparable analog semiconductor assets. Truist Securities believes a 20 times P/E ratio is more appropriate, which represents a two times discount to peers.
The new price target of $89.00 is based on the updated calendar year 2025 earnings per share estimate of $4.44, a decrease from the previous estimate of $4.83. Despite the lowered price target, the firm's Buy rating indicates a continued positive outlook on ON Semiconductor's stock performance.
In other recent news, onsemi experienced a modest revenue increase to $1.76 billion, marking a 2% sequential growth, as reported in their Third Quarter 2024 Earnings Conference Call. Despite year-over-year declines in automotive and industrial revenues, the company's silicon carbide and ADAS image sensors drove a 5% sequential increase in automotive revenue. Additionally, onsemi demonstrated a commitment to operational excellence with a 41% sequential rise in free cash flow, returning 75% of this flow to shareholders, including $200 million in share buybacks.
The company also projected Q4 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, onsemi anticipates an increase in automotive sales in the low to mid-single digits. However, industrial sales may remain flat or slightly decline.
InvestingPro Insights
Recent InvestingPro data provides additional context to Truist Securities' analysis of ON Semiconductor. The company's P/E ratio stands at 15.99, aligning closely with the analyst's observation of a 16 times P/E ratio. This valuation appears conservative, especially considering ON's strong financial position and market presence.
ON Semiconductor's revenue for the last twelve months as of Q2 2024 was $7.8 billion, with a gross profit margin of 46.3%. The company's operating income margin of 30.22% supports Truist's projection of potential margin expansion to 40%.
InvestingPro Tips highlight ON as a "Prominent player in the Semiconductors & Semiconductor Equipment industry" and note that it "Operates with a moderate level of debt." These factors contribute to the company's resilience and growth potential, supporting Truist's maintained Buy rating despite the lowered price target.
For investors seeking a deeper understanding of ON Semiconductor's prospects, InvestingPro offers 13 additional tips, providing a comprehensive view of the company's financial health and market position.
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