ON Stock Faces Challenges Amid Tech Sector Weakness

ON stock has experienced a significant decline of approximately 25%, dropping to $81.16 from its previous record high. These losses can be attributed to concerns surrounding the tech sector and restrictions on exporting to China. Additionally, the recent selloff in the chip sector, caused by Texas Instruments (TXN), further contributed to the decline. TXN reported weaker than expected sales and noted a decrease in demand from industrial customers. As a result, semiconductor stocks, including ON, witnessed a drop of 4%.

Key Concerns and Potential Solutions

While the stock has experienced a rapid decline, many of the concerns surrounding ON are likely already accounted for in its current price. The upcoming earnings report on Monday presents an opportunity for the company to demonstrate its resilience in the face of challenges related to China, industrial demand, and other business factors.

Mizuho analyst Vijay Rakseh believes that ON has a promising long-term outlook in terms of demand. Consequently, he asserts that there is no reason why investors should not consider it a buy.

Short-Term Challenges and Earnings Outlook

The immediate concern lies in the short-term outlook, but earnings could provide a potential solution. Analysts are projecting third-quarter sales of $2.15 billion and estimated earnings of approximately $1.34 per share. While these figures are slightly lower than the previous year’s numbers, this is primarily due to a decline in consumer-related chip sales. During its second-quarter earnings call, ON indicated that its conservative forward guidance was influenced by the current economic landscape.

Notably, ON has a history of surpassing earnings estimates, outperforming expectations in 17 out of the last 20 quarters. Furthermore, the company has achieved an annual sales growth rate of approximately 11% over the past four years. This track record led Wells Fargo analyst Gary Mobley to reiterate an overweight rating and set a $130 price target for ON ahead of their upcoming earnings report on October 30th.

ON Semiconductor: Resilient in the Face of China Issue

ON Semiconductor has managed to weather the storm caused by the China issue better than its competitors. While restrictions have affected many companies, ON has been able to keep its chips for electric vehicles and consumer electronics exempt from these limitations. As a result, the ban has not negatively impacted ON Semiconductor, according to Deutsche Bank analyst Ross Seymour.

Additionally, ON Semiconductor has a strategic advantage over Texas Instruments in terms of exposure to industrials. With nearly half of its revenue coming from the auto industry, ON relies heavily on software-based technologies that require chips. These chips have higher price points and are expected to drive sales growth in this segment at a rate in the high teens. Analysts have projected a total revenue growth of approximately 12% annually from the beginning of this year through 2026. If these projections hold true, ON Semiconductor’s sales could reach $11.7 billion by 2026.

Moreover, these software-based chips are more profitable, contributing to an anticipated rise in gross margins to over 50% by 2026. Analysts also expect a close to 16% annual growth in bottom-line earnings through that year.

To further boost its EPS, ON Semiconductor plans to implement stock buybacks. It aims to allocate approximately half of its cash flow towards repurchases. By slowing down the increase in long-term investments such as new equipment, this objective is achievable. If successful, EPS could grow almost 18% per year to reach $8.48 by 2026.

Given the promising growth prospects, ON Semiconductor’s stock is currently undervalued. Trading at just under 15 times EPS estimates for the next 12 months, it is below its peak of just over 20 times. Additionally, it trades at a lower price-to-earnings ratio compared to the S&P 500 index, which stands at 17 times. Furthermore, analysts expect ON Semiconductor to outperform the index in terms of EPS growth.

According to John McGinn, an analyst at Laffer Tengler Investments, now is an opportune time to consider purchasing ON Semiconductor shares due to their attractive valuation.

In conclusion, ON Semiconductor has proven its resilience in the face of the China issue and is well-positioned for future growth. With a strong presence in the auto industry and a focus on software-based technologies, the company is expected to experience significant sales growth in the coming years. Coupled with stock buybacks and anticipated EPS growth, ON Semiconductor’s stock has the potential to rise even further. Investors should seriously consider taking advantage of the current undervaluation.