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ON Semiconductor Corp. (ON) Up 7.3% Since Last Earnings Report: Can It Continue?

Zacks Equity Research

It has been about a month since the last earnings report for ON Semiconductor Corp. (ON). Shares have added about 7.3% in that time frame, outperforming the S&P 500.

Will the recent positive trend continue leading up to its next earnings release, or is ON Semiconductor Corp. due for a pullback? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at the most recent earnings report in order to get a better handle on the important catalysts.

ON Semiconductor Q2 Earnings Top Estimates

ON Semiconductor Corporation reported second-quarter 2020 non-GAAP earnings of 12 cents per share, which comfortably surpassed the Zacks Consensus Estimate of 2 cents. However, the figure declined 71% from the year-ago quarter’s level.

Revenues of $1.214 billion declined 10% on a year-over-year basis. The slowdown in macroeconomic activity across the world due to COVID-19 induced lockdowns caused the plunge.

ON Semiconductor intends to expand margins by streamlining its manufacturing footprint and accelerate the timeline for production with investments in the 300mm fab in east Fishkill. In the second quarter, the company initiated its first 300mm wafer production at East Fishkill lab. Moreover, it is considering potential sale of its six-inch fab located in Niigata, Japan.

Top-Line Details

Business Units Metrics:

ON Semiconductor has three business units — Power Solutions Group (revenues of $618 million), Analog Solutions Group (revenues of $427 million) and Image Sensor Group (revenues of $168 million).

End-Market Metrics:

Automotive (27% of revenues) end-market revenues were $327 million, down 26% year over year. The decline was caused by closure of automotive factories globally due to COVID-19.   

However, management noted that both U.S. and European markets have begun to recover slowly. The recovery is anticipated to continue throughout the year.

Markedly, the company holds a competitive edge over its peers when it comes to delivering a comprehensive image sensor solution for autonomous driving applications and ADAS. In the second quarter, the company bagged a major design win for its surround vision applications.

Moreover, the company continues to witness strong traction for its IGBT modules, silicon carbide (SiC) and silicon power products driven by growth in electric vehicles (“EVs”). Growing clout of the company’s solutions are expected to instill investors' optimism regardingthe stock in the upcoming days.

Industrial/Medical/Mil-Aero (29%) end-market revenues declined 3% year over year to $348 million due to coronavirus crisis-induced sluggishness in industrial activity and supply chain disruptions.

Nevertheless, management noted strong traction for SiC products utilized in industrial power applications.

Moreover, the company is gearing up for its first industrial IoT connectivity product in a year’s timeframe. Synergies from Quantenna acquisition are enabling the company to launch the product with robust Wi-Fi technology capabilities.

Communications (21%) end-market revenues increased 3% year over year to $255 million owing to robust growth in the 5G infrastructure business.

Computing (13%) end-market revenues increased 14% year over year to $158 million, courtesy of strong client and server business.

Consumer (10%) end-market revenues came in at $126 million. The figure declined 22% from the year-ago quarter’s level, primarily due to softness in consumer electronics stemming from COVID-19.

Margins in Detail

Non-GAAP gross margin of 30.8% contracted 630 basis points (bps) on a year-over-year basis. Per management, the decline was caused by lower revenues and additional costs due to COVID-19.

Non-GAAP operating expenses dropped 1.2% from the year-ago quarter’s figure to $284.6 million, due to restructuring and cost containment measures. 

Non-GAAP operating margin contracted 830 bps on a year-over-year basis to 7.4%, owing to lower gross margin.

Balance Sheet & Cash Flow

As of July 3, 2020, ON Semiconductor had cash and cash equivalents of $2.06 billion, compared with $1.982 billion as of April 3, 2020.

In the second quarter, the company had total debt (including current portion) of $4.74 billion, compared with $4.733 billion in the last reported quarter.

During the reported quarter, cash from operations came in at $154.5 million compared with the prior-quarter’s figure of $166 million.

Free cash flow came in at $81.2 million compared with $33.7 million in the previous quarter.

Guidance

For third-quarter 2020, ON Semiconductor projects revenues in the range of $1.20-$1.33 billion.

Management expects revenues from Automotive end-market to increase sequentially in the third quarter, driven by uptick in global automotive production.

Revenues from Industrial end-market are anticipated to decline on a quarter-over-quarter basis. Meanwhile, Communications end-market revenues are anticipated to decline sequentially in the third quarter. Revenues from Computing end-market is expected to increase on strength in client and server verticals. Consumer end-markets revenues is expected to increase in the third quarter due to seasonality.

For the third quarter, non-GAAP gross margin is projected in the range of 32-34%. Non-GAAP operating expenses are expected in the range of $277-$293 million.

How Have Estimates Been Moving Since Then?

In the past month, investors have witnessed an upward trend in estimates revision. The consensus estimate has shifted 17.2% due to these changes.

VGM Scores

At this time, ON Semiconductor Corp. has a subpar Growth Score of D, however its Momentum Score is doing a lot better with a B. Charting a somewhat similar path, the stock was allocated a grade of C on the value side, putting it in the middle 20% for this investment strategy.

Overall, the stock has an aggregate VGM Score of C. If you aren't focused on one strategy, this score is the one you should be interested in.

Outlook

Estimates have been trending upward for the stock, and the magnitude of these revisions looks promising. Notably, ON Semiconductor Corp. has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.



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