Buyouts & Product Rollouts Aid ON Semi: Should You Hold?
ON Semiconductor Corporation ON is an original equipment manufacturer (“OEM”) of a broad range of discrete and embedded semiconductor components. Shares of this Zacks Rank #3 (Hold) stock have gained 55.1% in the past year, substantially outperforming the industry’s rally of 28.4%.
The momentum can be attributed to expanding product portfolio and collaborations.
Factors Aiding ON Semi
ON Semi boasts strong product line and diversified customer base. Better-than-expected demand for CMOS image sensors, ADAS, power management products, wireless charging, mixed signal ASICs and sensor interface products are positives.
The company is focusing on IoT division. In this regard, ON Semi recently unveiled a new multi-sensor shield and expansion of software support for its IoT Development Kit (IDK). The new release will facilitate the IoT solution process for connected wellness, industrial wearables, smart home, predictive maintenance, asset tracking and other industrial IoT applications.
The addition of Fairchild’s offerings to product portfolio has made it lucrative, consequently driving demand in industrial end-markets. Further, the company’s acquisitions of Cypress Semiconductor’s CMOS Image Sensor Business Unit, Sanyo Semiconductor, AMI Semiconductor, Analog Devices’ power PC controller business, CMD, Catalyst, and SoundDesign gave it new technical capabilities, some custom ASIC products, higher-margin products, exposure to new end markets and greater product breadth.
ON Semi also collaborated with ConvenientPower Systems to develop in-vehicle wireless charging solutions. Under the agreement, ConvenientPower will develop, design and market in-vehicle wireless charging solutions, making use of ON Semi’s NCV6500 power management controller.
This collaboration in automotive wireless charging solution is anticipated to enhance ON Semi’s product portfolio and strengthen foothold in the automotive market.
Per Technavio, the global wireless charger market is anticipated to witness CAGR of more than 33% in the period 2016-2020, which will greatly benefit the company.
Further, ON Semi has a very well diversified business. The company generates a significant percentage of revenues from each of the computing, consumer, industrial, communications and automotive markets. This mitigates the impact of seasonality typical of any of the markets, resulting in balanced growth through the year. Moreover, this diversity also helps the company to offset any weakness in a particular market by growth in others.
Risks Remain
Despite stellar last quarter results, investors remain disappointed by the company’s guidance. Also, the company faces significant competition in all of the served markets. Additionally, leveraged balance sheet remains a concern.
We note that On Semi currently has a trailing 12 month P/E ratio of 20.19. This level compares unfavorably to some extent with what the industry saw over the last year. The ratio is higher than the average level of 17.65 and is toward its higher end of the valuation range over this period. Hence, valuation looks slightly stretched from a P/E perspective.
Bottom Line
The company has a long-term EPS growth rate of 12.2%.
Banking on these positives, we believe that ON Semi is one technology stock that investors should retain in their portfolio.
Stocks to Consider
Few better-ranked stocks in the broader technology sector are NVIDIA Corporation NVDA, Applied Materials, Inc. AMAT and Micron Technology, Inc. MU. All sport a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.
NVIDIA, Applied Materials and Micron have a long-term expected EPS growth rate of 13.26% 26.51% and 10%, respectively.
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