Calculating The Fair Value Of ON Semiconductor Corporation (NASDAQ:ON)
I am going to run you through how I calculated the intrinsic value of ON Semiconductor Corporation (NASDAQ:ON) using the discounted cash flow (DCF) method. Anyone interested in learning a bit more about intrinsic value should have a read of the Simply Wall St analysis model. Also note that this article was written in February 2018 so be sure check the latest calculation for ON Semiconductor here.
What’s the value?
I use what is known as the 2-stage model, which, as the name states, takes into account two stages of growth. The first stage is generally a higher growth period which levels off heading towards the terminal value, captured in the second ‘steady growth’ period. To start off, I pulled together the analyst consensus estimates of ON’s levered free cash flow (FCF) over the next five years and discounted these values at the cost of equity of 11.11%. When estimates weren’t available, I’ve extrapolated the average annual growth rate over the previous five years, capped at a reasonable level. This resulted in a present value of 5-year cash flow of US$3.47B. Want to understand how I calculated this value? Check out our detailed analysis here.
Above is a visual representation of how ON’s earnings are expected to move going forward, which should give you an idea of ON’s outlook. Then, I calculate the terminal value, which accounts for all the future cash flows after the five years. I’ve decided to use the 10-year government bond rate of 2.8% as the steady growth rate, which is rightly below GDP growth, but more towards the conservative side. The present value of the terminal value after discounting it back five years is US$8.34B.
The total value, or equity value, is then the sum of the present value of the cash flows, which in this case is US$11.81B. The last step is to then divide the equity value by the number of shares outstanding. This results in an intrinsic value of $27.75, which, compared to the current share price of $24.37, we find that ON Semiconductor is about right, perhaps slightly undervalued at a 12.19% discount to what it is available for right now.
Next Steps:
Whilst important, DCF calculation shouldn’t be the only metric you look at when researching a company.
For ON, I’ve put together three relevant aspects you should further research:
Financial Health: Does ON have a healthy balance sheet? Take a look at our free balance sheet analysis with six simple checks on key factors like leverage and risk.
Future Earnings: How does ON’s growth rate compare to its peers and the wider market? Dig deeper into the analyst consensus number for the upcoming years by interacting with our free analyst growth expectation chart.
Other High Quality Alternatives: Are there other high quality stocks you could be holding instead of ON? Explore our interactive list of high quality stocks to get an idea of what else is out there you may be missing!
PS. Simply Wall St does a DCF calculation for every US stock every 6 hours, so if you want to find the intrinsic value of any other stock just search here.
To help readers see pass the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price sensitive company announcements.
The author is an independent contributor and at the time of publication had no position in the stocks mentioned.
