Analysts' Choice: ON Semiconductor On Focus List

5/29/2017


  Recent Price
$16
  Dividend
$0.00
  Yield
0.0%
  P/E Ratio
16
  Shares (millions)
426
  Long-Term Debt as % of Capital
60%
  52-Week Price Range
$16.08 - $8.11

ON Semiconductor ($16; ON) never stops evolving. Today it looks much different than it did a decade ago.

Less reliance on computer demand: In 2006, consumer and computing products accounted for 45% of revenue. In the March quarter, those two end markets represented just 26% of revenue, with the rest coming from the automobile, industrial, and communications markets.

More real-world applications: Analog and power semiconductors make up more than three-fourths of ON's sales, up from 43% in 2006. While digital semiconductors process computer data, analog chips help regulate functions such as temperature, speed, and electricity — making them vital to millions of products outside the technology sector.

Sustainable and profitable growth: ON's increasingly diversified business model should lessen its cyclicality.

Today's ON Semiconductor serves such growth markets as car automation, industrial robotics, and wireless charging for smartphones. ON, added as a Buy and a Long-Term Buy on May 11, joins the Focus List this week.

Big growth

The consensus projects per-share-profit growth of 42% this year and 16% next year. Quarterly profits topped the consensus by 8% in the March quarter, and analyst estimates for both years have risen at least 3% in the last 30 days.

Over the last three years, ON has boosted sales at an annual rate of 17%, while per-share profits rose at a 19% annual clip and free cash flow 47%. During that period, operating profit margins rose to 19.9% from 17.5%. Acquisitions juiced those growth rates. ON made a $2.5 billion acquisition in 2016 and about $500 million in purchases in 2014. Excluding the Fairchild purchase, revenue would have risen 7% in the December quarter; including the deal, sales rose 50%.

The company expects revenue growth superior to that of the broad semiconductor industry because of its focus on the automotive (7% to 9% expected long-term industry revenue growth) and industrial (3% to 5%) markets. ON says profit margins will continue to expand.

The September purchase of Fairchild Semiconductor has driven much of the company's torrid growth in the last two quarters. Booking for the Fairchild business jumped 49% in 2016, while in the March quarter bookings reached their highest point in three years. The shares have gained 7% in the wake of strong quarterly results and optimistic profit guidance.

Assisted by the Fairchild business, ON expects its content per mobile phone to rise 20% to 30% in the second half. Coupled with major production ramps on the part of handset makers, the content gain explains much of the company's optimism. Analysts expect sales growth to slow to 2% in 2018, a target that seems overly conservative.

Despite its growth, ON trades at just 16 times trailing earnings, 25% below the industry median. The company's long-term debt (60% of total capital) probably contributes to the discount. ON says paying down debt is its priority target for excess cash.

You can obtain an annual report for ON Semiconductor Corp. at 5005 E. McDowell Road, Phoenix, AZ 85008; (602) 244-6600; www.onsemi.com.

ON SEMICONDUCTOR
Quarter
Per-Share Earnings*
($)
Sales
Change
Quarterly
Price Range
($)
P/E Ratio
Range
Mar '17
0.21
vs.
0.16
76%
16.06
-
12.37
18 - 14
Dec '16
0.29
vs.
0.19
50%
13.32
-
10.74
17 - 13
Sep '16
0.24
vs.
0.23
5%
12.55
-
8.11
16 - 10
Jun '16
0.21
vs.
0.22
0%
10.15
-
8.21
13 - 10
           
Year
(Dec.)
Sales
 ($Bil.)
Per-Share
Earnings*
($)
Per-Share
Dividend
($)
52-Week
Price Range
($)
P/E Ratio
Range
2016
3.91
0.90
0.00
13.32
-
6.97
15 - 8
2015
3.50
0.83
0.00
13.50
-
8.40
16 - 10
2014
3.16
0.75
0.00
10.44
-
6.76
14 - 9
2013
2.78
0.53
0.00
8.73
-
6.80
16 - 13
 
Quadrix Scores †
Overall
Momen-
tum
Value
Quality
Financial
Strength
Earnings
Estimates
Performance
99
97
86
85
45
94
77

   * Earnings exclude special items.
   † Quadrix scores are percentile ranks, with 100 the best.
   NA Not available.


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