Earnings Analysis: On Semiconductor (ON)

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 Semi held their 2016 third quarter results back on November 6.  Results were earnings of $0.24 on $950.9M.  These results were mixed with expectations of earnings of $0.24 on revenue of $955.5M.  During the quarter, they completed their acquisition of Fairchild semiconductor and are seeing larger synergies develop faster than expected, while at the same time seeing increased complimentary products than originally expected.  It's also important to note that the miss on revenues is the $5M not realized due to divestitures the company made over the third quarter.  

The quarter, as a whole, wasn't really a lot to write home about.  While things don't seem to be going terribly poorly, you don't see signs of new or accelerating growth, either.  As management described their forecase, "flat" was used a lot.  For a stock speculated on for growth and under value, propositions.  That said, I do expect the synergies to help provide some earnings and margin growth.  The fourth quarter tends to be exceptionally weak, seasonally, for Fairchild and is one of On's weakest quarters as well.  This results in earnings expectations around $0.22 and full year earnings only around $0.85.  They do expect a much larger increase in earnings in 2017, though I believe most of it to be simply the addition of Fairchild's earnings.  

In regards to the stock, it's trading at just over 13 times this year's expected earnings of $0.85.  Analysts have a much higher expectations for 2017 earnings, but I'm going to be conservative and set my earnings expectations of $1.05.  There are some stock risks with rising rates and the new presidency that is coming into place poses risk from trade perspectives as well.  I'm lowering my multiple for the stock to the 13 times earnings we're currently at and setting my price target around $13.50.  That said, I don't see the stock getting that high until the back half of next year.  As such, I'm lowering my ranking of this stock to a 3.  I think there's room for some upside yet, but as the stock does rise, it's feeling advisable to lighten up on the stock.

Nothing on this site should be taken as advice, research, or an invitation to buy or sell any securities.  All views expressed are solely of my own and I am not a professional money manager.  Please consult with your financial adviser before taking any action in your own portfolio.