ON Semiconductor Analyst Turns Bullish, Expects Upside Surprises In Second Half

With fundamentals bottoming, ON Semiconductor Corp’s ON seems poised to post upside surprises, and the stock valuation will likely expand as the company tracks to its 2022 target margins, according to Jefferies.

The Analyst

Mark Lipacis upgraded ON Semiconductor from Hold to Buy and raised the price target from $26 to $29.

The Thesis

ON Semiconductor reported first-quarter revenue of $1.387 billion, marginally missing the consensus expectation. Growth was driven by comms, which grew 15 percent year-on-year, while automotive grew only 4 percent and the industrial segment declined 5 percent, Lipacis said in a Tuesday note. (See the analyst's track record here.)

The company posted an EPS beat of 4 cents, with higher-than-expected gross margin expansion and lower opex.

ON Semiconductor guided to second-quarter revenue of $1.385 billion, lower than the consensus estimate of $1.435 billion. But the EPS outlook for the quarter came in 1 cent above expectations, mainly due to lower opex.

Lipacis said he agrees with ON Semiconductor’s commentary that semis are entering “a sustained period of upward revisions.”

Both OEM and distributor inventories declined, and April saw a marked upturn in distributor resales, the analyst said.

China showed signs of improving and there was a significant uptick in orders for the second half of 2019, he said.

“We expect ON to report upside to consensus expectations as the supply chain starts restocking inventories in 2H19,” Lipacis said. The consensus estimates appear too conservative and upside surprises are in the offing, according to Jefferies.