ON isn't like other microchip makers

Recent Price $86
Dividend $0.00
Yield 0.0%
P/E Ratio 16
Shares (millions) 448.2
Long-Term Debt as % of Capital 31%
52-Week Price Range $86.15 - $44.76

 

ON Semiconductor ($86; ON) is something of an outlier in its industry. ON shares treaded water over the past 12 months, while the average S&P 1500 Index semiconductor stock sank 13%. Yet at 13 times trailing earnings, ON shares trade below their industry norm of nearly 16 and their own five year norm of 17. For the 12 months ended September, ON’s per-share profits soared 132%, highest in the semiconductor industry. In that span, ON also grew sales 27%, operating cash flow 63%, and free cash flow 55% — all above sector norms.

ON also has limited exposure to the market for personal computers, which suffered a 29% sales slump in the December quarter, its sharpest decline since the mid-1990s. A PC recovery might not occur until 2024. The stock earns a Quadrix® Overall score of 94, bolstered by ranks of 90 for Momentum and 93 for Quality. ON Semiconductor is a Focus List Buy.

Business breakdown

ON is the industry’s second-largest supplier of discrete power transistors used for high-voltage applications, which generate about half of the company’s revenue. These transistors act as switches or amplifiers that send signals and store information.

Semiconductors destined for the automotive end market represent about 34% of ON’s revenue, up from 21% 10 years ago. Industrial semiconductors account for 27% of revenue, versus 15% a decade ago. ON’s remaining sales come from data centers, routers, gaming, 5G infrastructure, smartphones, and PCs.

ON’s recent operating momentum reflects continued strength in the automotive, factory-automation, medical, and energy-infrastructure end markets. But industrial markets closely tied to consumer spending had begun to weaken by October.

Management also cautioned that wafer starts for the September quarter had dropped 20% from peak levels, set in the March quarter. Still, ON seems confident about pricing for 2023, noting a “very stable” environment and its ability to pass on higher costs to customers. Notably, ON has steadily revamped its operations in the past couple years by exiting less-profitable businesses that focus on price-sensitive, nondifferentiated products. Management added that in a downturn, its gross profit margins would likely only suffer a small drop from current levels.

Nevertheless, analyst estimates for 2023 have steadily contracted over the past 90 days. The consensus now calls for earnings per share to fall 15% on a revenue decline of 3%. Plenty of pessimism already appears baked into the shares, which trade at 14 times estimated year-ahead earnings — a 17% discount to their industry norm.

Conclusion

ON shares have performed okay ahead of earnings season, gaining 3% in the past month. For the December quarter, ON is expected to report per-share profits of $1.27, up 17%, and revenue of $2.08 billion, up 13%. ON has topped the consensus profit estimate in 10 straight quarters. The company typically posts December quarter results in early February.

ON Semiconductor Corp., 5005 E. McDowell Road, Phoenix, AZ 85008, (602) 224-6600, www.onsemi.com.

 

 

Quarter Per-Share Earnings* Sales Change Quarterly Price Range P/E Ratio
Range
Sep '22 $1.45 vs. 0.87 26% $76.78 - $44.76 17 - 10
Jun '22 1.34 vs. 0.63 25% 67.19 - 46.56 18 - 12
Mar '22 1.22 vs. 0.35 31% 71.26 - 51.02 24 - 17
Dec '21 1.09 vs. 0.35 28% 70.27 - 41.88 32 - 19

 

Year
(Dec.)
Sales
(Bil.)
Per-Share Earnings* Per-Share
Dividend
52-Week Price Range P/E Ratio
Range
2021 $6.7 $2.95 $0.00 $70.27 - $32.32 24 - 11
2020 5.3 0.85 0.00 32.93 - 8.17 39 - 10
2019 5.5 1.49 0.00 24.70 - 15.57 17 - 10
2018 5.9 1.96 0.00 27.10 - 14.55 14 - 7

 

Quadrix Scores
Overall Momen-
tum
Value Quality Financial
Strength
Earnings
Estimates
Perform-
ance
Reversion
94 90 55 93 86 60 87 2

 

* Earnings exclude special items.
NA Not Available.
Quadrix® scores are percentile ranks, with 100 the best.
e Dividend and yield estimated.