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12/2/21 - ON Semiconductor Corporation (ON) - Wall Street’s Best Digest Daily Alert

This semiconductor company beat analysts’ earnings estimates by $0.13 last quarter.

This semiconductor company beat analysts’ earnings estimates by $0.13 last quarter.

ON Semiconductor Corporation (ON)
From Dow Theory Forecasts

Some of you may be wondering why we recently initiated coverage of ON Semiconductor as a Buy and a Long-Term Buy, and are adding it to the Focus List this week, given that we already recommend four semiconductor-related stocks. Rest assured; we don’t make such moves lightly.

We see ON as capable of outgrowing its peers, in part by expanding its presence in newer end markets, such as cloud power, electric-vehicle charging, and machine-vision applications like automotive cameras. ON also stands to benefit from the accelerating pace of data-center creation. The company generates more than $300 per 5G platform.

ON sells into the right niches of the semiconductor space. The company projects the market for sensor semiconductors (14% of ON’s revenue in the year ended September) will grow at an annualized rate of 10% through 2025, reflecting continued demand for industrial automation and autonomous cars. Revenue for power semiconductors (51% of revenue) should expand at a 6% annual clip, driven by the push for energy efficiency and the electrification of consumer and industrial products. ON’s two biggest end markets are automotive (34% of company sales) and industrial (26%).

Some market pundits have voiced concerns that the semiconductor boom is slowing. We can’t rule out such concerns, but in our view it’s too early to panic, for at least three reasons:

  • Investors remain confident, as evidenced by the iShares Semiconductor ETF’s ($527; SOXX) return of 19% over the last three months, 31% over the last six, and 52% over the last 12. Fearmongering aside, plenty of people are still buying.
  • Every new generation of microprocessor requires more power than the last. Given the use of semiconductors in more and more products, we see growth in both the number and complexity of microchips in coming years.
  • Today’s products require smarter chips, with artificial intelligence and automated decision making.

The above factors should support growth of semiconductor sales in general and ON Semiconductor in particular.

Analysts target growth of 24% in sales and 167% in per-share profits for the December quarter, followed by 6% higher sales and 16% higher profits next year. Consensus projections have jumped since ON reported better-than-expected results for the September quarter and issued encouraging guidance. ON has made a habit out of topping targets recently, exceeding the sales and profit consensus in each of the last six quarters, averaging outperformance of 3% in sales and topping the profit target by at least 18% in five of the six periods.

The combination of ON’s ability to consistently beat the consensus and its recent history of improving profitability (operating profit margins and returns on assets, investment, and equity up in four straight quarters), we see the potential for market-beating results in the year ahead.

Richard Moroney, CFA, Dow Theory Forecasts,, 800-233-5922, November 22, 2021