Stock Analysis: On Semiconductor (ON)

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.

On Monday, On Semiconductor announced 2015 first quarter results.  Results were rather positive, with earnings beating estimates by two cents coming in at $0.20 on higher than expected revenues of $870.8M (I am pretty certain estimates were about $862M).  In addition, guidance was positive and comments made in the conference call stated they expect this year to be "better than normal."

In all, it isn't easy to poke holes in this quarter's results.  Inventory reserves were up by 2 days, but that is in anticipation of a strong second quarter.  Currency translation was larger than anticipated by ($8M compared to their estimate of $6M), however, as you see by revenues and earnings, the company was able to be successful despite that.  Additionally, since the end of the first quarter, the US Dollar has been falling from its highs, providing less impact in the near future at the least.  The electronics portion of the business, which includes networking and cell phones was down compared to last quarter, but this was in line with normal seasonality.  Things that are in the company's control, appear to be under control.  Demand for products appears strong, and order wins continue to happen.  The only "bad" thing that remains is that the company only purchased $95M worth of stock in the quarter.  If things are going well and they expect to continue to do well, it could be argued that they should buy more stock while prices are cheap.  That's a real stretch for a negative, though, as they have to work within their cash flows and they still purchased more than the quarterly averaged $62.5M ($1B spread across 16 quarters to meet their four year plan).

The strong items were, well, quite strong.  Besides earnings, revenues, and guidance, the Aptiva integration should be complete this quarter and deliver $0.08 of accretive gains this year alone, with most synergies not being realized until the third or fourth quarter.  The key businesses for this company continues to be the auto and industrials, in my opinion.  Electronics is good icing and their wireless charging solutions could prove to be an ongoing influence over the next couple years - pending it takes off with consumers.  But they have a leading market share in cameras and sensing equipment for autos and industrials.  This is where the growth will come over the next few years, I believe.  Autonomous vehicles are slowly becoming a prominently viable solution.  We're starting with blind spot detection, rear view cameras, and other sensors which help keep the cars in their lanes, parallel park, or control speed.  On is involved with many of these features and as cars become even more capable of "driving themselves," I believe On will be at the forefront of delivering the capabilities with their design wins.  The stock had been getting hit and was downgraded over the last 6 weeks.  I believe people are missing these components to the company's success and the fact that management spoke to gaining market share may be all the more an example of just how well they are operating.  Add into it the stock buyback factor.  Last quarter's buyback averaged at $11.20 per share.  I can say, while watching the stock that when that thing was hitting the $11.60-$11.80 range, I felt certain they were in there buying.  While I have no proof, I think I was right.  Now, after the stock jumped big on the quarterly results, it's pulled back with the markets.  However, it now is acting like it has a $12 floor.  I'm not as convinced that the company is in there buying at this point yet, but I feel it's safe to think it wouldn't be long before they will be if they're not now.  This is really helping put in a floor for the stock right now.

For the stock as a whole, I'm upgrading it to a 2.  While I was disappointed I didn't get rid of some stock when things got hot, the downgrade and other concerns I had do not appear to be warranted.  The stock has resettled itself at prices that are more realistic at this time - especially with a sideways market like we're seeing with the S&P 500 as has been the case for 2015 so far.  The company being in there buying helps as well.  I rank the company a 2 because of my cost basis and overall position size.  For those looking to invest, I'd say get in at or below $12.  I still believe this stock is heading to $15, however, I don't think it will happen in 2015.  I still maintain my $0.86 earnings target for the year and give the stock a multiple of 15.  Generally speaking, this means I have the 2015 price target set at $13.  The stock has already surpassed that this year, but it may take all year before we see it get that high again unless next quarter is a blow out, forcing me to adjust earnings for the year.

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