Stock Analsys: On Semiconductor (ONNN)

Notes:
Stock Ratings: 1 = buy at current stock prices, 2 = buy on a 5-10% dip in stock price, 3 = sell on a 5-10% increase in stock price, 4 = sell at current stock prices to raise cash.  Ratings are based upon 12-18 month outlook on stock direction and not necessarily related to moves I make due to financial positioning.

After the closing bell today, On Semiconductor announced fourth quarter and fiscal year earnings results.  Fourth quarter earnings came in at $0.17, beating estimates by a penny.  Earnings of $864.2M also beat expectations on the quarter.  To round out the trifecta of a good earnings report, the company also announced continued strong sales going into the current quarter and provided very encouraging guidance for 2015.  Revenue guidance is $840M to $880M, basically flat quarter over quarter.  This is a typical pattern for the company's seasonality, but with the added benefit of a stronger than normal quarter this time around.  80-85% of those expectations are accounted for in the form of back orders as well and also accounts for $6M in currency translation impact.  

Though I don't want to be a cheerleader, I'm finding it difficult to find holes in both the quarter and the guidance.  The TrueSense and Aptima integrations are proving to be more accretive than anticipated and their integration into the company is already proving some valuable wins in the automotive and wireless businesses.  The company bought back about 8 million shares, totaling over just $64M of the $1B over 4 year plan they put in place in December.  The automotive business is strong and they're seeing a lot of promise in their wireless charging solutions, much less all the other places they play to improve battery safety and power management in the cell phone business.  They even protected themselves against currency impacts of the US Dollar against European and Asian currencies.  Finally, inventories are down from last quarter - so there isn't a glut building up to be worried about.  The only spot I can show a little concern is that their margin rates are lower than desired.  Much of that has to do with the acquisitions they made last year and it is one of their three key focal points in the next year.  I believe they're capable of achieving 35-36% margin rates next year.

So this takes me to my projections.  Given the strong business trends, I would project that the company could earn $0.86 in 2015 - a 15% earnings increase over 2014's results.  That is based upon pure operations alone.  Now you need to take into consideration the company's stock buyback program.  This will raise earnings per share by reducing share count.  Just taking an even swag at $250M per year will have a rather dramatic impact on share price.  I'm willing to guess that whenever that stock goes below $9.90, the company is in there buying shares right now.  This helps maintain some support if people want to sell.  I also estimate it will result in roughly a fifty cent per share appreciation in stock price just by the repurchase alone.  So if we take my earnings projection, keep the 13.4 multiple the stock currently has, then add the 50 cents and you have a $12 price target.  I think this number is conservative as share buy backs and good performance will likely increase that multiple.  The down side is that the stock isn't heavily shorted, so we aren't likely to see a lot of short squeezes to pop the stock higher.  Due to the price jump I'm expecting in tomorrow's open, I'm keeping the stock ranked at a 2.  However, if this thing nears or goes below $10, I think you'll want to be in there buying the stock - likely with the company.

One final note, I've made a trade in part on and have commented on the technical patterns I've seen for the company over the last number of years.  The company has a habit of stalling and pulling back during the late spring and summer months only to start taking off near the end of summer.  Truthfully, This stock buyback could completely alter that pattern.  While I think it is prudent to watch for signs of the pattern repeating, I believe this stock is much more about the catalyst of the auto business that is doing so well.  That is now the primary catalyst to the trade with the technicals being the supporting information.