ON Semiconductor Faces Potential Multiple Contraction, Morgan Stanley Says In Downgrade

ON Semiconductor Corp ON shares have run up too fast for Morgan Stanley's liking, prompting the firm to press the sell button.

The Analyst

Analyst Craig Hettenbach downgraded ON Semiconductor from Equal-weight to Underweight and lowered the price target from $20 to $18.50.

The Thesis

The bearish call concerning ON was issued along with Morgan Stanley shifting to a Cautious stance on the semiconductor industry as a whole, Hettenbach said in a Thursday note. (See the analyst's track record here.) 

The shares have meaningfully outperformed thanks to the successful integration of the Fairchild acquisition and the strongest analog cycle since 2010, the analyst said.

Given that ON has seen better multiple expansion than peers, Hettenbach said the shares face greater risk if the cycle reverses.

"ON's fundamental performance is worse than peers during downturns, leading the stock to underperform," Hettenbach said. 

ON Semiconductors' lead times are elevated, forcing customers and distributors to stock inventory, the analyst said. This exposes the company to the risk of an inventory correction once lead times normalize, he said; Hettenbach projects that lead time swill normalize by the fourth quarter.  

The semiconductor company is also exposed to an inventory correction in the industrial market, which is its second-largest market, accounting for about 26 percent of sales.

The Price Action

ON Semiconductor shares have gained about 7 percent year-to-date.

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