On Semiconductor 'Significantly Undervalued': Analyst

On Semiconductor, a chipmaker expected to have strong 5G product exposure, is seeing better-than-expected orders from customers, proving it's uniquely positioned to double its earnings over the long-term, an analyst says.
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On Semiconductor may be a lesser-known chip maker, but the stock could be an incredibly strong performer over the next year, according to analysts at Needham and Company. 

"We contend ON is significantly undervalued," wrote Needham analyst Rajvindra Gill. "Few companies have a financial profile to grow margins by 500-700 basis points and double EPS over the long-term." 

Gill thinks On Semi can reach $3 in earnings per share over the long-term. Analysts polled by FactSet currently estimate the company can achieve EPS of $1.60 for 2020 and $1.94 for 2021. The stock trades at $24.82, or roughly 15 times 2020 earnings, but Gill assigns a multiple of 18 to his 2020 EPS estimate, with his price target at $30. Gill's call represents almost 21% upside from the stock's current level. 

First off, Gill sees On's pricing and revenue rebounding, after more than a year of pricing and revenue declines for the global semiconductor industry. That's a view widely held by analysts, who see the uptick benefiting most chip companies

But after meeting with management, Gill also sees higher-than-expected orders from customers across the company's segments.

Automotive sales account for roughly one-third of On's total revenue, and the automotive segment, which includes electric vehicles, is seeing higher orders. Gill is looking for high single-digit percentage growth year-over-year in 2020 for automotive, which is one contributing factor to his call for On's revenues to grow annually at 9% over the coming five years. 

In addition, handsets are currently tracking at a higher rate of orders for the usual rate for the quarter ended March, "driven by an aggressive 5G roadmap by the Chinese original equipment manufacturers," according to Gill. Chip analysts have recently asserted that the bulk of the 5G device ramp in 2020 will be driven by demand in China

After a slight pause in 5G production ramp-ups in late 2019, On Semi indicated to Needham that 5G infrastructure spending will reaccelerate in the middle of 2020 "as the major mobile operators roll out their 5G base station deployments," Gill said. 

On is not only benefiting from better pricing and higher volumes from growth areas such as 5G and electric vehicles, but Gill says he expects lower manufacturing costs to be another contributor to margin expansion.

For comparison, On peer Texas Instruments  (TXN) - Get Report is expected to see solid growth and operating margin of above 30% and trades at above 20 times next year's earnings.