Pacific Crest Upgrades ON Semiconductor, Expects It To Outperform Expectations

Future Catalysts

The brokerage said ADAS is the future content driver for ON, which has 70 percent "automotive image sensor market share and three-year design win visibility."

"We estimate ADAS could drive ON's image sensor content over 3x to $28 per vehicle in the next three years, driving over $0.20 of incremental EPS over the same period," analyst Michael McConnell wrote in a note.

In addition, McConnell estimates light vehicle production units will reach a 97 million run-rate in 2018–2019 and 101 million in 2020–2022, with an ADAS adoption rate of 35 percent and 60 percent, respectively.

Related Link: KeyBanc Upgrades ON Semiconductor Citing Expected Acquisition Performance

"As a result, the ADAS opportunity for ON could represent incremental revenue of $660 million and EPS of $0.22 per year in two to three years (2018–2019) and revenue of $1.5 billion and EPS of $0.48 per year in four to six years (2020–2022)," McConnell highlighted.

M&A Activity And Chatter

Meanwhile, the Fairchild acquisition is likely to exceed targeted synergies of $150 million. The $150 million target equates to EPS accretion of $0.35.

The analyst noted that ON excluded potential manufacturing synergies ($20 million to $60 million in cost savings per fab) in its guidance, which McConnell estimates could drive $0.05 to $0.14 of additional EPS accretion for every fab closure.

Further, ON should benefit from the upcoming content expansion and share gains in Intel Corporation INTC's Skylake notebook platform given Broadwell inventory depletion.

"Given recent signs of inventory reductions of Broadwell-based notebooks at PC OEMs, we expect ON's content and share gains in Skylake to finally start materializing in 2H16. We estimate the Skylake platform should drive an incremental $110 million in revenue and $0.03 in EPS to our model," McConnell added.

Raising Estimates

The analyst raised 2016 EPS estimate to $0.87 (Street: $0.84) from $0.82 and revenue view to $4.113 billion (Street: $3.443 billion) from $3.433 billion.

According to TipRanks, McConnell has a success rate of 64 percent with an average return per recommendation of +4.4 percent. The analyst is ranked 1,000 out of 3,979 analysts.

At the time of writing, shares of ON were up 2.65 percent to $10.06. The analyst has a price target of $13 on the stock.