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What Pushed ON Semiconductor Stock to a 15-Year High?

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ON stock rises to a 15-year high

ON Semiconductor (ON) stock rose to a 15-year high of $15.81 on February 13, 2017, the day after the company released better-than-expected 4Q16 earnings. These strong earnings were driven by the company’s faster integration of Fairchild Semiconductor, better-than-expected seasonal demand, and strong organic growth in the automotive, industrial, and communications markets.

These strong earnings saw several analysts raise their price targets for ON Semiconductor. Some analysts who had downgraded their ratings for ON due to its high leverage also raised their ratings after the company stated that it looks to delever its balance sheet over the next two years.

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ON Semiconductor’s end markets

ON Semiconductor (ON) supplies analog, mixed-signal, advanced logic, and power management solutions to five end markets: automotive, industrial, communications, consumer, and computing. The integration of Fairchild Semiconductor increased ON’s exposure significantly in the fast-growing automotive, industrial, and communications segments. ON also reported strong guidance for the next three years.

Automotive is likely to be the company’s fastest-growing segment for 2017 as the demand for cameras inside ADAS (advanced driver assistance systems) increase.

Impact of Fairchild integration on ON Semiconductor

ON’s integration of Fairchild Semiconductor is proving to be better than expected. ON Semiconductor’s non-GAAP[1. generally accepted accounting principles] profits rose 75% year-over-year in fiscal 4Q16. The company expects this integration to help it reach its target model of a 40% gross margin and an 18% operating margin from its annual revenues of $4 billion.

The Fairchild Semiconductor integration would bring several cost and revenue synergies as the two companies have complementary product portfolios and little product overlap. Moreover, the two companies have a diversified customer base and little overlap in customers. The small overlap would bring in cost synergies while the complementary products would bring in cross-selling opportunities and incremental revenues and profits in the coming years.

ON’s organic growth

ON Semiconductor (ON) also saw strong organic growth in its core business. The company secured design wins in the automotive and industrial markets and witnessed seasonal demand in the communications space.

ON reported 7% YoY organic growth in fiscal 4Q16, which was almost in sync with rival Maxim Integrated’s (MXIM) 7.9% YoY growth but lower than Analog Devices’s (ADI) 28% YoY growth for the same quarter.

You can gain exposure to ON’s peers through the PowerShares QQQ ETF (QQQ), which holds ~11.1% of its portfolio in semiconductor stocks. QQQ has 0.22% exposure in MXIM and 0.41% in ADI.

In this series, we’ll look at the ON–Fairchild integration and its impact on ON’s earnings and balance sheet.

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