Semiconductors may be in short supply, but profits at ON Semiconductor aren't. And you can see it in ON stock, though it has struggled lately with market drops.
The Phoenix-based company, also known as Onsemi, said its earnings per share more than quadrupled in the most recent quarter and for all of 2021. Strong demand for sophisticated electronics in electric and gas cars, as well as chips for industrial automation, drove its results.
Onsemi is a turnaround story. A maker of power control and sensing chips, it has been weeding out less-profitable products and selling off older chip fabrication plants, moving to what it calls a "fab-liter" model. The result? Its gross profit margin under generally accepted accounting principles rose to 45.1% in the fourth quarter from 34.4% in the year-earlier quarter.
"Our long-term plan was to get to 45% margins, (but) the current market has allowed us to pull these levers" to get there faster, Onsemi Chief Financial Officer Thad Trent told Investor's Business Daily. "It is a structurally different company now, and we're excited about what's ahead of us."
Deutsche Bank Securities analyst Ross Seymore is bullish on the company.
"Onsemi has refined its strategy to focus on faster-growing end markets," Seymore said. "These are very sticky design wins."
For instance, the company's silicon carbide products for electric cars could be at a run rate of $1 billion in revenue by the end of 2023, said Piper Sandler analyst Harsh Kumar. That figure could balloon to $2 billion by 2025, Kumar said.
Stellar Earnings Growth
On Feb. 7, Onsemi reported record financial performance for the fourth quarter and full year 2021. Revenue in the fourth quarter grew 27.6% year over year to $1.85 billion.
Full-year sales climbed 28.3% to $6.74 billion. Earnings per share soared 357% to 96 cents in the fourth quarter. For the year, per-share earnings surged 305% to $2.27.
"Our highly differentiated intelligent power and sensing portfolio" is driving growth, Chief Executive Hassane El-Khoury said in a news release. The company is focused on "secular megatrends," including electric vehicles, advanced driver-assistance systems, alternative energy, and industrial automation.
ON stock analysts see higher profits ahead. The average estimate for Onsemi earnings in the just-ended first quarter of 2022 is an adjusted $1.04 a share vs. 35 cents in the year-earlier period, according to FactSet.
Analysts forecast Onsemi earnings of $4.17 in 2022 vs. $2.95 in 2021, FactSet said.
ON Stock Consolidating
ON stock hit a record high of 71.26 on Jan. 4 ahead of the stock market correction. For the past 14 weeks, ON stock has been consolidating with a buy point of 71.35, according to IBD MarketSmith charts. However, it ended the regular session on April 5 at 55.70 amid a tech stock sell-off.
ON stock has an IBD Composite Rating of 95 out of 99, according to IBD Stock Checkup. IBD's Composite Rating combines five separate proprietary ratings into one easy-to-use rating. The best growth stocks have a Composite Rating of 90 or better.
ON stock ranks first among 44 stocks in IBD's semiconductor manufacturing industry group. Plus, it has a strong EPS rating of 90 and an SMR — sales plus margins plus return on equity — rating of A.
Piper's Kumar forecasts big gains for ON stock. He is targeting a move to 75 this year and 115 in the next few years.
Automotive Chips Racing
Cutting-edge technology is at the heart of every successful chipmaker. At Onsemi, that technology comes in the form of power control and sensing products.
"Power management ICs (integrated circuits) are a semiconductor building block that's in every item that has power," Baird analyst Tristan Gerra said.
The automotive market for semiconductors is particularly hot.
"The car of two years ago is very different than the car of today," Onsemi CEO El-Khoury said on CNBC on Feb. 16. "It's a computer platform that happens to have wheels and goes from A to B."
El-Khoury sees demand for automotive chips outstripping supply through 2022.
Silicon Carbide Tech Interests Street
ON Stock analysts are keen on Onsemi's investment in silicon carbide wafer manufacturing technology.
Onsemi acquired GT Advanced Technologies, a privately held producer of silicon carbide, in late October for $415 million in cash. Further, Trent said Onsemi will make acquisitions that accelerate internal development and are accretive financially.
"Silicon carbide is used in an electric car's inverter, taking power from the battery and getting it to the axel," Trent said. "It extends the range of an EV."
Electric-vehicle maker Tesla uses silicon carbide. And other electric-car makers are "moving in that direction," Trent said. That adoption is a "tailwind for us," he said.
Further, Onsemi dominates the car camera market, with 60% share worldwide, Kumar said. It's also a strong player in radar and lidar, two robotic-vision technologies needed for autonomous driving, the ON stock analyst said.
ON Stock: Pruning Products and Fabs
Onsemi, which now employs roughly 33,000 people, went public in April 2000. The company was a spinoff from Motorola's Semiconductor Components Group.
El-Khoury and Trent joined Onsemi in late 2020 and early 2021, respectively. Both came from Cypress Semiconductor, a chipmaker they also revamped. Infineon Technologies bought Cypress for $10 billion in April 2020.
Onsemi intends to grow auto and industrial products from 60% of revenue in 2021 to 75% by 2025, Trent said. Meanwhile, it's exiting other, older semiconductor products, he said.
Strong demand, and short supply, of semiconductors for cars dominates the news. But industrial automation also is experiencing strong growth, driven by technological advances, giving a boost to ON stock. Plus, Onsemi sells chips for cloud computing and 5G cellular networks.
The company has exited two older fabs and is currently cutting a third one. But Kumar says it will cease operations at other older fabs, further lowering costs and improving efficiency.
So in 2019, Onsemi acquired GlobalFoundries' 300-millimeter wafer fab, located in East Fishkill, N.Y.
"The move to newer fabs (like the 300 mm fab) gives you a better cost structure," the ON stock analyst said.
Onsemi competitors include Infineon, Microchip Technology, NXP Semiconductors, Renesas Electronics, STMicroelectronics and Wolfspeed.
