Buying The Bounce In ON Semiconductors

A Global Recovery In Autos Drives ON Semiconductor Results

What does the global auto-recovery have to do with semiconductors, you might ask? The answer is a lot. Today’s cars have a growing number of microchips in them and there is a strong rebound in the auto industry underway right now. Not only that but the auto market is also shifting to smart cars, electric vehicles, and autonomous driving which are all chip-heavy avenues of growth. And this can all be seen in results from ON Semiconductor (NASDAQ:ON), results that not only grew on a YOY basis but firmly beat the analyst’s consensus targets.

 ON Semiconductors Beats And Raises

In the ever-changing tug-of-war we now as market dynamics it is always important to take note of company’s who beat the consensus target and raise their guidance because their stock tends to outperform where others do not. That is why ON Semiconductor’s $1.45 billion in net revenue is impressive. The company not only grew by 3.6% over last but the consensus by 660 basis points and reversing an expected loss. Revenue was driven by improving business in all segments with a notable increase in the auto segment. Sales to auto OEMs rose to $491 million setting a record and accounts for 34% of the gross.

Moving down the report, the adjusted gross margin grew on a YOY basis and also beat the consensus by 40 basis points. This led to annual operating cash of $884.3 million at the end of the fiscal year and up from last year’s $694.7 million. FCF is more impressive, up over 300% on a YOY basis, as is the GAAP earnings. The GAAP earnings improved by 50% over last year’s 4th quarter while adjusted grew by a smaller 17%.

“In the fourth quarter, we saw strong improvement in business trends driven by a broad-based improvement in the global macroeconomic environment, lean inventories, and a steep recovery in the automotive end-market, in which we continue to see our content growth exceed the overall automotive market growth. Based on current demand trends and the global macroeconomic outlook, we expect to continue to see above seasonal demand trends in the near term,” said Hassane El-Khoury, president and CEO of ON Semiconductor.

The company’s guidance reflects the 4th quarter strength and CEO commentary. Exec’s upped the target for Q1 revenue to $1.41 to $1.51 billion and operating margin to 36% which are both above the analyst’s consensus. This is already spurring chatter in the analysts’ community notably a price increase to $35 from $25 by Raymond James.

The Analysts Love On Semiconductors

The consensus price target and rating for ON Semiconductors are bullish but once again don’t truly reflect what is going on in the community. Over the past month, there have been at least 6 major rating reiterations that all came with a price target increase. The consensus of those 6 is closer to the $42.50 to $45 range than it is to the greater consensus of 30. The takeaway is that other analysts are will likely follow suit with a rating and/or price target upgrade.

The Technical Outlook: ON Semiconductors Makes Trend Following Bounce

The technical outlook for ON Semiconductors is not only bullish but showing a textbook entry signal. The stock recently set a high, pulled back to test support, and then bounced from support on good news. The move is supported by the indicators as well which are consistent with support and rolling towards a more-bullish signal that we expect will come fairly soon. In the near-term investors might expect to see the price action move up to test resistance at the $38.50 to $39 level where it might pull back or correct. At that point, a confirmation of support and/or a break to new highs could be used as an entry. Until then, price weakness or retests of the EMA might also be viewed as an entry point.