ON Semiconductor Quarterly Profit Beats The Street; Analyst Says Buy

ON Semiconductor beat quarterly profit estimates driven by a broad-based macroeconomic recovery and robust demand for the US chipmaker’s automotive and cloud-based products.

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Adjusted earnings per share in the third quarter dropped 18% to 27 cents year-on-year beating analysts’ estimates by 7 cents. ON Semiconductor’s (ON) total revenue declined 5% to $1.32 billion and was in line with the Street consensus. Sales rose 9% from the second quarter.

“Our margins in the third quarter expanded significantly quarter over quarter due to normalization of our operations following the initial impact of the COVID-19 pandemic and growth in our revenue. Gross margin expansion is the key strategic priority for the company, and we are making strong progress in optimizing our manufacturing footprint and qualifying our 300mm manufacturing processes,” said ON Semiconductor CEO Keith Jackson. “Fundamentals of our business remain strong with accelerating momentum in automotive, industrial, and cloud-power end-markets and strong operating leverage from revenue growth.”

Jackson expects “above seasonal demand trends across most end-markets in the near term, as global business activity continues to normalize.”

Looking ahead, ON Semiconductor anticipates fourth-quarter revenue to generate between $1.3 billion to $1.4 billion based on product booking trends, backlog levels, and estimated turns levels, the company said. GAAP and non-GAAP gross margin for the fourth quarter of 2020 is forecast to be between 32.9% and 34.9%.

The fourth-quarter outlook also includes anticipated stock-based compensation expenses of about $16 million to $18 million. In addition, net cash paid for income taxes is expected to be between $22 million to $28 million.

Shares of ON Semiconductor have now fully recovered since hitting a low in May and are trading 3% higher than at the start of the year. (See ON Semiconductor stock analysis on TipRanks).

Ahead of the financial results, Rosenblatt Securities analyst Kevin Cassidy on Oct. 30 reiterated a Buy rating on the stock with a $35 price target, saying that ON shares have been his top pick going into the earnings season.

“Stronger automotive market demand should provide upside for ON,” Cassidy wrote in a note to investors. “Recent rebound in COVID cases has driven the market down. While this resurgence is concerning, we do not expect a return to broad shutdowns of manufacturing.”

From here, the analyst expects gross margin expansion as end market demand increases and ON’s internal manufacturing utilization returns to the +85% range from ~60%.

The rest of the Street has a cautiously optimistic outlook on the stock. The Moderate Buy analyst consensus breaks down into 12 Buys versus 1 Hold and 2 Sells. The $26.88 average price target provide investors with 7% upside potential in the coming 12 months.