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Why Is ON Semiconductor Corp. (ON) Up 7.5% Since Last Earnings Report?

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It has been about a month since the last earnings report for ON Semiconductor Corp. (ON - Free Report) . Shares have added about 7.5% in that time frame, outperforming the S&P 500.

Will the recent positive trend continue leading up to its next earnings release, or is ON Semiconductor Corp. due for a pullback? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at the most recent earnings report in order to get a better handle on the important catalysts.

ON Semiconductor's Q3 Earnings & Revenues Top Estimates

ON Semiconductor reported record third-quarter 2021 results, wherein the top and bottom lines surpassed the respective Zacks Consensus Estimate as well as marked a significant year-over-year improvement.

The company came up with non-GAAP earnings of 87 cents per share, outpacing the Zacks Consensus Estimate by 17.6%. It reported earnings of 27 cents per share in the year-ago quarter.

Revenues of $1.74 billion beat the Zacks Consensus Estimate by 1.8% and improved 32% on a year-over-year basis. The top line benefited from an increase in supply, and favorable mix and pricing across all end-markets served.

ON Semiconductor’s record third-quarter results are mainly driven by a strong demand environment, particularly for power and sensing products in automotive and industrial end markets.

Top-Line Details

Power Solutions Group or PSG revenues of $892.1 million (accounting for 51.2% of revenues) surged 38% year over year, courtesy of strength in automotive and industrial end markets.

Advanced Solutions Group or ASG revenues of $613.5 million (35.2% of revenues) increased 24% on a year-over-year basis, driven by robust automotive and computing end markets. Solid demand for high-end graphic cards aided computing growth.

Intelligent Sensing Group or ISG revenues of $236.5 million (13.6% of revenues) improved 35% year over year, primarily driven by a strong automotive end market.

In terms of end markets, Automotive (33% of revenues) revenues were $575.6 million, up 36.6% year over year. The company witnessed record revenues in this end market driven by strong demand for power and sensing product categories. ON Semiconductor continues to gain traction among electric vehicle manufacturers for both silicon carbide and insulated-gate bipolar transistor-based products.

Industrial (27.5% of revenues) end-market (includes military, aerospace and medical) revenues increased 48.4% year over year to $478.5 million. The top-line growth benefited from strong demand for higher power modules and alternative energy applications, driven by large investments in solar installations. The company also witnessed solid year-over-year growth of 45% in imaging revenues driven by machine vision and scanning applications.

Automotive and Industrial end markets together accounted for almost 60% of total revenues. The Automotive and Industrial end market witnessed 4% and 11% sequential growth, respectively, for this quarter. Both these end markets are growing two times faster than the other end markets. Other (39.5% of revenues) end-market revenues grew 20% year over year to $688.1 million.

Yet, the company is suffering from supply constraints, especially for certain products that are manufactured by its foundry partners. ON Semiconductor expects that the demand for Intelligent Power and Sensing solutions in strategic end markets will continue to outpace supply throughout 2022.

Operating Details

Non-GAAP gross margin of 41.5% expanded 800 basis points on a year-over-year basis. The improvement was led by a favorable mix of higher-margin products and pricing, efficiency in manufacturing, and shutdown of low-margin non-core businesses.

Non-GAAP operating expenses climbed 4.4% year over year to $296.2 million.

Non-GAAP operating margin expanded to 24.5% from the year-ago figure of 12%, courtesy of a higher revenue base and improvement in gross margin.

Balance Sheet & Cash Flow

As of Oct 1, 2021, ON Semiconductor had cash and cash equivalents of $1.39 billion compared with $1.09 billion on Jul 2, 2021. The company had $1.97 billion undrawn on the revolving credit facility.

Total debt (including current portion) as of Oct 1, 2021 was in line with $3.11 billion reported on Jul 2, 2021.

Third-quarter 2021 cash flow from operations amounted to $448.9 million compared with the previous quarter’s reported figure of $488 million.

Capital expenditures for the quarter were $93.2 million, which equate to a capital intensity of 5.4%. ON Semiconductor is spending a major part of capital expenditure toward enabling its 300-millimeter capability at the East Fishkill fab and the expansion of silicon carbide capacity.

Free cash flow amounted to $355.7 million compared with $383.2 million in the previous quarter. During the first nine months of 2021, the company generated operating and free cash flows of $1.16 billion and $880.4 million, respectively.

Guidance

For fourth-quarter 2021, ON Semiconductor expects revenues within $1.74-$1.84 billion.

Non-GAAP gross margin is projected in the range of 42-44%. Non-GAAP operating expenses are expected to be $298-$313 million.

Non-GAAP earnings are envisioned between 89 cents and $1.01 per share.

How Have Estimates Been Moving Since Then?

In the past month, investors have witnessed an upward trend in estimates review. The consensus estimate has shifted 23.57% due to these changes.

VGM Scores

Currently, ON Semiconductor Corp. has a nice Growth Score of B, though it is lagging a lot on the Momentum Score front with a D. Following the exact same course, the stock was allocated a grade of D on the value side, putting it in the bottom 40% for this investment strategy.

Overall, the stock has an aggregate VGM Score of D. If you aren't focused on one strategy, this score is the one you should be interested in.

Outlook

Estimates have been trending upward for the stock, and the magnitude of these revisions looks promising. It comes with little surprise ON Semiconductor Corp. has a Zacks Rank #1 (Strong Buy). We expect an above average return from the stock in the next few months.


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