On Jan 6, Zacks Investment Research upgraded ON Semiconductor (ONNN) to a Zacks Rank #1 (Strong Buy) from a Zacks Rank #3 (Hold). The upgrade came largely on the back of the company’s enhanced capital deployment policies. The stock is currently trading at a forward P/E of 11.5x with long-term earnings growth expectation of 16.6%.
Why the Upgrade?
ON Semiconductor continues to focus on disciplined capital allocation, strong and flexible balance sheet position, and cash flow enhancement to support dividend growth. The company recently announced that it will repurchase $1.0 billion shares immediately. Additionally, the company announced its decision to return approximately 80% of free cash flow, after deducting repayments of long-term debt.
We remain positive on the company’s strong cash position and ability to service its long-term debts. Moreover, continuous share buybacks will inspire investors’ loyalty through high returns.
The current optimism surrounding the stock may also be attributed to some extent to the product launches and the company’s growth in the CMOS Image Sensor market. According to the IHS Image Sensor Market Tracker, the company held approximately 6% of the $3.12 billion image sensor market in 2013.
ON Semiconductor expects to steadily improve operating profitability and consistently invest in new products and technologies.
Moreover, the company gained momentum from strong fundamentals and better-than-expected third-quarter results released on Oct 30. Since then, the stock has moved up more than 23%.
ON Semiconductor’s top line increased 10% sequentially and 16.5% year over year to $833.5 million. The company benefitted from the broad-based strength in its end markets. However, non-GAAP earnings of 21 cents missed the Zacks Consensus Estimate by a penny due to order slowdowns.
For fourth-quarter 2014, ON Semiconductor projects revenues in the range of $835.0–$875.0 million, up 2.6% sequentially at the mid-point, driven by design wins across multiple markets and possible share gains. The relatively improved top-line projection further indicates that the company’s growth momentum is likely to continue, going ahead.
ON Semiconductor has a well-diversified business and an end-market focus that would typically generate relatively steady revenues throughout the year. Also, we expect the recent product launches and numerous design wins in the automotive market to act as strong growth catalysts over the long term.
Other Stocks to Consider
Other stocks that look promising in the industry and are worth a look include M/A-Com Technology Solutions Holdings, Inc. (MTSI), sporting a Zacks Rank #1, and CSR plc (CSRE) and Microchip Technology Inc. (MCHP), with a Zacks Rank #2 (Buy).
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