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How Analysts View ON Semiconductor

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Feb. 27 2017, Updated 9:05 a.m. ET

ON’s stock performance

In this series, we’ve seen that ON Semiconductor (ON) reported better-than-expected earnings thanks to the accelerated Fairchild Semiconductor integration and a strong demand environment. However, the merger also put a huge debt burden on ON’s balance sheet, reducing its financial flexibility. This debt burden caused many analysts to lower their expectations from the stock, even though it outperformed its peers in fiscal 2016.

In fiscal 2016, ON Semiconductor stock rose 49.6%, outperforming its rivals Analog Devices (ADI), Texas Instruments (TXN), and Maxim Integrated (MXIM), which rose 45.3%, 44.9%, and 19.3%, respectively. Since the start of fiscal 2017, ON stock has increased 23%.

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Analysts’ ratings

Following ON Semiconductor’s 4Q16 earnings, several analysts increased their price targets on the stock. These analysts include Baird, Mizuho, Needham, Pacific Crest Securities, and Susquehanna Financial Group.

Wall Street analysts are more optimistic about ON and ADI and gave them “strong buy” recommendations. They gave “hold” recommendations for Texas Instruments and Maxim Integrated.

ON has an average price target of $17.50, which is higher than its 52-week high of $15.86. The stock is currently trading at a discount of 10% from the target. The average price targets of TXN, MXIM, and ADI are also above their 52-week highs, indicating strong optimism in the analog and power management industry.

What do analysts think about ON? 

ON Semiconductor (ON) is seeing strong growth in orders and design wins, and we believe that this momentum could continue even amid a weak macroeconomic environment. This improvement could be possible because the company’s end markets of industrial, automotive, and communications are growing faster than the industry. Moreover, the Fairchild Semiconductor merger has put ON in a leadership position in the power management market, increasing its content per device offerings.

Needham & Company analyst Rajvindra Gill stated that merger synergies and improved pricing environment could help ON report higher margins. He stated that improvement in ADAS (advanced driver assistance systems) would almost triple the sensor market, with six to ten cameras per vehicle. This could provide an opportunity for ON to supply $48–$80 in content per vehicle. ON also has $32 in content in front LED headlights.

Mizuho Financial Group analyst Vijay Rakesh also sees strong growth opportunities for ON in the industrial and automotive markets, especially the cameras in ADAS.

Overall, ON is off to a solid start in 2017 and, in our view, could outperform the semiconductor industry with its strengths in the automotive, industrial, and communications markets.

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