Earnings Analysis: On Semiconductor (ON)
Back on August 7, On Semiconductor posted and had an earnings call for second quarter results. Revenues came in at just under $1.34B. Earnings, unfortunately, missed analyst estimates of $0.32, by six cents, coming in at $0.26. Despite the mixed quarter, people seem relatively pleased with the results. Perhaps that had something to do with the guide up in revenues and free cash flow. On the latter, the increased their free cash flow guidance by 20%, raising it $100M for the year to a range of $600M to $650M. On the revenues, they guided the third quarter up above what analysts expected, to a range of $1.34B to $1.39B. The automotive group, in particular, was surprising as they guided a flat guidance on what is seasonally a down quarter - all despite the obvious automotive sales slowdown in the US. I think the biggest tell of the future quarters was a specific line from management:
While expenses for the quarter were a little higher than anticipated, they were all related to performance-based pay adjustments. All other items were as to be expected so I don't have worries about costs getting out of control. The earnings miss does disappoint me some and I wish I could better explain why the company missed estimates by six cents, but at this point I don't have the explanation. The revenues and gross margins were huge successes, though, and the future runway for the company appears to be favorable. Despite the miss on earnings, analyst expectations were still guided up by ten cents over the last couple of weeks. Their estimates for the company this year is now at $1.39. For next year, they're at $1.58. I, unfortunately, cannot get this excited. While I think the earnings and profit prospects seem strong, for now at least, I'm not sure how we get earnings that high, given third quarter guidance. As such, I'm keeping my 2017 earnings estimates at $1.19 and 2018 at $1.30 for now. I still maintain a fair multiple in the 13 to 14 range, given the nature of the semiconductor industry, but note that there does appear to be runway for success finally. This places my 2018 price target at the $17 - $18 area. At this time, we're going through the period of time that the stock typically doesn't perform as well, but I expect it to start picking up in the back half of September, so use pullbacks now to accumulate more shares, if you're interested in this stock.
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.
"Customers continue to remain concerned about potential supply tightness as demand continues to grow at a steady pace."All indications are that the company's absorption of Fairchild is going extremely well. They're well on track to their plans and synergies gained from the combination are exceeding expectations. It won't be until first quarter next year when we really see the full benefits, though. Despite that, design wins are coming in strong and the Fairchild arm is seeing more sales than it has ever over its last 3 years. This boost in earnings and profits also positions the company to be likely to get its balance sheet deleveraged ahead of schedule. If that happens, it positions them to either return capital to investors sooner or they're readily positioned to invest further into the company's future.
While expenses for the quarter were a little higher than anticipated, they were all related to performance-based pay adjustments. All other items were as to be expected so I don't have worries about costs getting out of control. The earnings miss does disappoint me some and I wish I could better explain why the company missed estimates by six cents, but at this point I don't have the explanation. The revenues and gross margins were huge successes, though, and the future runway for the company appears to be favorable. Despite the miss on earnings, analyst expectations were still guided up by ten cents over the last couple of weeks. Their estimates for the company this year is now at $1.39. For next year, they're at $1.58. I, unfortunately, cannot get this excited. While I think the earnings and profit prospects seem strong, for now at least, I'm not sure how we get earnings that high, given third quarter guidance. As such, I'm keeping my 2017 earnings estimates at $1.19 and 2018 at $1.30 for now. I still maintain a fair multiple in the 13 to 14 range, given the nature of the semiconductor industry, but note that there does appear to be runway for success finally. This places my 2018 price target at the $17 - $18 area. At this time, we're going through the period of time that the stock typically doesn't perform as well, but I expect it to start picking up in the back half of September, so use pullbacks now to accumulate more shares, if you're interested in this stock.
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.
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.
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