Tuesday, February 14, 2017

Earnings 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 Semi reported fourth quarter and fiscal year 2016 results and what results they were!  Fourth quarter earnings came in at $0.29 and revenues were $1.26B, both of which were beats compared to analyst expectations of $0.23 and $1.21B respectively.  And then the company hit the trifecta and guided higher than expectations for next quarter with higher margins as well.  Cash flow was strong and while earnings were above expectations, expenses were at the middle of expectations, showcasing the higher margin performance compared to what was expected.  Essentially, this was a blowout quarter with great execution on the Fairchild acquisition, where they're already well ahead of schedule.  

As I said, the company also provided guidance that was better than expected.  They essentially guided in line with this quarter's results, which isn't exactly normal for a fourth quarter to first quarter transition for this company.  The third and fourth quarters tend to be their strongest, so that should help provide some perspective on just how strong management is feeling the next year will be for them.  Additionally, should the cash continue to flow this well, they stated they plan to be aggressive on using that cash flow to clean up the balance sheet, which has been a concern I've noted with them going through with the purchase of Fairchild.  Their focus on Automotive and Industrial applications, in particular appears to be the right focus as more and more demand is being seen for their auto sensors, cameras, and LED lighting systems, as well as the same types of sensory items that will play into the movement towards IoT.  These strategies also appear to be helping in cross-selling with customers as well as just overall design wins which continue to reap benefits and show strength in demand.

With some new facts in front of me, I am going to upgrade the stock to a 2, but there's a catch.  I am much more favorable of the stock's long-term prospects, as I'm about to go into, but the stock has had a dramatic run and discipline is saying it's getting to be time to protect gains.  As I look at the stock's prospects, I now see the potential for the company to earn about $1.19 for 2017 and maybe $1.30 in 2018 if we don't run into inventory problems.  I'm still in the camp that a fair multiple for the stock is about 13 times earnings.  That puts a 2017 price target at $15.50 and 2018 at $17.  You'll note that the current stock price is really pushing that 2017 target and we're heading into the "off season" for the stock and the company's earnings.  This has me uneasy and thinking about getting at least some of my profits off the table in anticipation that we'll see a pullback.  I like the long-term prospects of the stock, that's for certain.  Just be careful of when you get into it.  It's more often wise to pay attention to disciplines than it is to bypass them.

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.