Wedbush Upgrades ON Semi, Sees 'Final Reset to Expectations'

• ON Semiconductor Corp ON shares are down 12 percent in the last six months, despite staging a small recovery through October.
• Wedbush’s Betsy Van Hees upgraded the rating on the company from Neutral to Outperform, while raising the price target from $12 to $14.
• Expectations have now been reset and the company is poised to benefit in 2016 from revenue growth opportunities, improving utilization rates and more stringent spending, Van Hees said.

ON Semiconductor reported mixed 3Q results, with EPS of $0.23 ahead of Wedbush’s estimate by a penny due to controlled spending. The company’s revenue figure of $904MM was marginally short of the Street expectations of $907MM.

Gross margin contracted 50 bps from 34.6 percent in 2Q to 34.1 percent in Q3, impacted by a sequential decline in utilization rates, product mix, and ASP pressure in certain markets, analyst Betsy Van Hees mentioned.

ON Semiconductor announced its 4Q revenue guidance at $830-$890MM, significantly short of the Street expectations of $892MM. The company also projected a decline in OpEx from$202MM in Q3 to $188-$198MM, exhibiting a quick move to lower spending.

Van Hees pointed out that the upgrade was on account of:

1. Expectations having been reset: Street expectations were not reflecting any additional weakening of the macro environment
2. Lowered OpEx: The company is taking quick measures to reduce OpEx and is also exhibiting the willingness to take further action if necessary.
3. ON Semiconductor’s share buyback plan: The company has continued to repurchase shares aggressively, buying 9.4M shares for $100MM in 3Q. Of the $1B authorization announced in December 2014, about $648MM remains.
4. The company is well positioned to benefit in 2016: It would benefit next year from “(1) revenue growth opportunities in auto, industrial, image sensors, and wireless charging , (2) improving utilization rates driving GM improvement, and (3) tempered spending.”

Van Hees added that the price target has been raised due to a roll over from 2016 to 2017 pro forma EPS estimate.