ON Semiconductor Okays Capital Allocation Policy; Shares Up - Analyst Blog

ON Semiconductor (ONNN) announced that its board of directors has approved a new capital allocation policy to reward shareholders. Following the news, the share price rose 5.7%, touching $9.65 and eventually closing at $9.54.

The company, which currently has about 444.9 million outstanding shares, will repurchase $1.0 billion shares on an immediate basis. However, the $300 million stock repurchase program announced in August last year has been terminated.

Additionally, the company announced its decision to return approximately 80% of free cash flow, after deducting repayments of long-term debt, to shareholders.

The enhanced capital deployment reflects ON Semiconductor's strong balance sheet as well as its confidence in long-term business prospects. Cash flow from operations in the third-quarter 2014 came in at $92.3 million.

During the recently concluded quarter, the company repurchased 2.6 million shares for $23.0 million at an average price of $9.23 per share. The cash and short-term investments balance was $494.9 million at quarter-end versus $601.2 million in the prior quarter. The company had $1183.6 million of total debt (long-term plus short-term) on its balance sheet, with debt equity ratio being 41.4%.

ON Semiconductor has a well-diversified business and an end-market focus that would typically generate relatively steady revenues throughout the year. The company's third-quarter earnings missed our expectations but the top line beat the same. The third quarter was impacted by a slowdown in orders in the second half of September, but management expects a recovery in orders to be shipped in the first half of 2015, indicating that the company's fundamentals remain intact.

However, ON Semiconductor's significant debt position, ever-increasing competition and integration risks related to Aptina and Truesense remain major concerns.

Currently, ON Semiconductor has a Zacks Rank #4 (Sell). Some better-ranked stocks that are performing well at the current levels include Inphi Corporation (IPHI), M/A-Com Technology Solutions Holdings, Inc. (MTSI) and NVIDIA Corporation (NVDA). All these stocks have a Zacks Rank #2 (Buy).

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