On Semiconductor Valuation Is Attractive Ahead Of Earnings Acceleration, Benchmark Says In Bullish Initiation

Notwithstanding apprehensions concerning the timing of a recovery in the semiconductor cycle, one analyst at Benchmark is upbeat about the prospects of ON Semiconductor Corp ON.

The Analyst

Ruben Roy initiated coverage of ON Semiconductor at Buy with a $26 price target.

The Thesis

ON has executed well in recent years to shift the company's product mix to higher value markets, analyst Roy said in a Friday morning note. This shift in exposure to higher-end markets such as automotive, industrials and cloud/data center markets should ultimately yield margin leverage, he added.

As opposed to the broader semiconductor market, which is expected to grow at a 4% CAGR through 2022, ON expects CAGRs of 9%, 6% and 13%, respectively for its strategic target markets of automotive, industrial and cloud/data center, Roy noted.

Despite the expected demand recovery not materializing, the analyst said he is encouraged with continued inventory corrections and the company's belief it is under-shipping true end demand.

This, according to the analyst, should support a strong recovery when demand improves.

"...many of ON's focus market design wins are single-sourced as opposed to being multi-sourced in the computing and consumer markets, which ultimately should lead to more stability in top-line performance, in our view," Benchmark said.

The firm sees the company's valuation as attractive ahead of earnings acceleration.

"As ON continues to execute on its longer-term product road-map and end market targets, we expect continued multiple expansion to follow," the firm added.