Get On Board With ON Semiconductor Corporation

Accelerating Demand Drives ON To Record Demand 

Shares of ON Semiconductor Corporation (NASDAQ: ON) are moving higher in premarket action and on track to set a new high very soon. The Q1 results are a shining example of a trend we’ve seen throughout the market. The company has been working on internal operations even while external demand factors drive business and add to earnings leverage. The company reports not only a strong quarter but one in which earnings grew by triple digits and sequential improvement at all levels was forecast for the next.  In our view, with the global chip shortage still driving business, ON Semiconductor should not only be able to top the new guidance but continue to guide higher into the end of the year. 

"We delivered strong results driven by disciplined execution in a strong demand environment across our focus end-markets. Our gross margin initiatives are beginning to show early results with first quarter gross margin expanding by 80 basis points quarter-over-quarter. We remain confident in our ability to further expand our margins as we continue to make structural changes to the business," said Hassane El-Khoury, president and CEO of ON Semiconductor.

ON Semiconductor Reports In-Line With Consensus 

The only thing troubling about the ON Semiconductor Corporation Q1 report is that it was as-expected. The $1.48 billion in revenue is up `15.6% from last year and 2% sequentially but only beat the consensus by 1.3%. That’s a good figure but not a wow number in a world where semiconductor strength is widely accepted. Notably, revenue strength was driven by record results in the automotive segment. Sales to OEM manufacturers increased by 5% YOY to $515 million or about 35% of net revenue. 

"The momentum in our strategic automotive and industrial end-markets is accelerating. During the first quarter, we secured key platform design wins for our Silicon Carbide and Silicon based power products, further solidifying our market leadership in vehicle electrification."

The company’s internal efforts have been largely focused on operational efficiency and margin expansion and those efforts are paying off. The company reports adjusted and GAAP gross margin of 35.2% or up 370 basis points from last year. The margin increase helped to drive strong improvement in cash from operations and FCF which are up 31.6% and 327% respectively. On the bottom line, the GAAP $0.20 of EPS missed consensus by $0.02 but we prefer to focus on the YOY comparison; last year ON reported -$0.02 in earnings for the period. On an adjusted basis, the company earned $0.35 per share or up 250% from last year and $0.01 ahead of the consensus. 

ON Semiconductor Corporation Guides Q2 Above Consensus 

ON Semiconductor Corporation is also representative of another trend we’ve spotted in the market, that of giving cleared guidance than we’ve seen for the last year. In regards to ON Semiconductor, that guidance is better than expected and calling for not only sequential improvement in revenue but accelerating earnings growth. The company is forecasting $1.57 to $1.67 billion in revenue versus the $1.49 consensus estimate with margins advancing at least 60 basis points. This should drive EPS in the range of $0.44 to $0.54 versus the $0.39 consensus and lead to a round of analysts upgrades for the quarter and full-year. 

The analysts are overwhelmingly bullish on this stock although their consensus price target is lagging the market. At $35.90 it is about 8% below the recent price action and that is not counting the premarket gains made post-release. The most recently set targets have price action closer to $45, the high is $50, but even these are more than 30-days stale. There’ve been no upgrades yet but, considering the strength of Q1 results and guidance, we are expecting to see both the high-end and consensus target begin to move higher. 

The Technical Outlook: ON Semiconductor Corporation Moves Up From Support 

Shares of ON  Semiconductor gained about 1.75% in premarket trading to confirm the presence of support at the $39.25 level. This level should be a fairly strong support level and could drive price action back up to retest the recent highs. A break to new highs would be very bullish considering the guidance and could lead to a $16 to $20 upside movement before the end of the summer. We get these targets, in the range of $55 to $59, by projecting the flagpole formed over the last 8 months of price action.