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A month has gone by since the last earnings report for ON Semiconductor Corp. (ON). Shares have added about 9.7% 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 drivers.
ON Semiconductor Q4 Earnings Top Estimates
ON Semiconductor reported fourth-quarter 2020 non-GAAP earnings of 35 cents per share, which surpassed the Zacks Consensus Estimate by 25%. Moreover, the figure increased 16.7% from the year-ago quarter’s level.
Revenues of $1.446 billion beat the Zacks Consensus Estimate by 6.5% and increased 3.2% on a year over year basis. The top line benefited from a recovering macroeconomic environment and rebounding automotive end-markets.
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. Moreover, the company is in talks with potential buyers to offload its six-inch fab located in Niigata, Japan and other fab facility located in Belgium.
ON Semi also announced that it divested the fab located in Rochester, NY. The company expects to realize savings of $15 million from first-quarter 2021.
Business Units Metrics:
ON Semiconductor has three business units — Power Solutions Group (revenues of $716.4 million), Advanced Solutions Group (revenues of $522.1 million) and Intelligent Sensing Group (revenues of $207.9 million).
Automotive (34% of revenues) end-market revenues were $491.3 million, up 6% year over year. The upside was driven by gradual recovery witnessed in the automotive sector. Management expects the recovery to continue in the near term.
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. ON semiconductor is also witnessing increasing demand for its LiDAR offerings.
Industrial/Medical/Mil-Aero (24%) end-market revenues increased 2% year over year to $384.3 million owing to rebound in worldwide industrial activity. However, certain customer-specific concerns stemming from geopolitical issues were the offsetting factors.
The company’s power modules are witnessing strong uptake along with its alternative energy related applications.
Communications (18%) end-market revenues declined 7.3% year over year to $264.4 million.
Computing (13%) end-market revenues increased 22% year over year to $187.9 million, courtesy of strong client and server business.
Consumer (11%) end-market revenues came in at $154.4 million, down 2% from the year-ago quarter’s figures.
Margins in Detail
Non-GAAP gross margin of 34.4% contracted 20 basis points (bps) on a year-over-year basis. Per management, the decline was caused by unfavorable forex headwinds.
Non-GAAP operating expenses fell 6.8% from the year-ago quarter’s figure to $292.4 million due to restructuring and cost-containment measures.
Non-GAAP operating margin expanded 190 bps on a year-over-year basis to 14.2%, owing to lower gross margin. The operating margin benefitted from decline in operating expenses.
Balance Sheet & Cash Flow
As of Dec 31, 2020, ON Semiconductor had cash and cash equivalents of $1.081 billion compared with $1.654 billion as of Oct 2, 2020.
In the fourth quarter, the company had total debt (including current portion) of $3.49 billion compared with $4.24 billion in the last reported quarter.
During the reported quarter, cash from operations amounted to $400.4 million compared with the prior-quarter’s figure of $163.4 million.
Free cash flow came in at $284 million compared with $101.8 million in the previous quarter.
A Look at 2020 Results
ON Semi reported revenues of $5.255 billion in 2020, down 4.8% from 2019 tally.
Non-GAAP earnings per share were 85 cents compared with $1.49 reported in 2019.
Non-GAAP gross margin contracted 340 bps to 32.7%, while non-GAAP operating margin contracted 390 bps to 10.2%.
For 2020, ON Semi generated cash flow from operations of $884.3 billion compared with $694.7 million in the previous year. Free cash flow during 2020 was $500.7 million compared with $160.1 million in 2019.
For first-quarter 2021, ON Semiconductor projects revenues in the range of $1.41-$1.51 billion.
For the first quarter, non-GAAP gross margin is projected in the range of 34.1-36.1%. Non-GAAP operating expenses are expected in the range of $313-$327 million.
For the automotive end-market, management expects robust uptake of its Silicon Carbide (SiC) and IGBT products in the electric vehicles’ (EV) domain.
Revenues from Industrial end-market are anticipated to benefit from higher demand for its alternative energy applications as well as momentum seen in the company’s machine vision factory automation applications including XGS family of image sensors.
Meanwhile, Communications end-market revenues are anticipated to witness solid growth in 2021 driven by rapid deployment of 5G.
How Have Estimates Been Moving Since Then?
It turns out, estimates revision have trended upward during the past month. The consensus estimate has shifted 35% due to these changes.
At this time, ON Semiconductor Corp. has an average Growth Score of C, a grade with the same score on the momentum front. Following the exact same course, 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.
Estimates have been trending upward for the stock, and the magnitude of these revisions looks promising. It comes with little surprise ON Semiconductor Corp. has a Zacks Rank #2 (Buy). We expect an above average return from the stock in the next few months.
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