Bullish BofA Expects ON Semiconductor's Growth To Return In Q2

Despite ON Semiconductor Corp ON's below-par first-quarter revenue guidance, one Bank of America Merrill Lynch analyst is bullish on its prospects.

The Analyst

Analyst Vivek Arya reiterated a Buy rating and $23 price target for ON shares.

The Thesis

ON, a provider of semiconductor components, reported in-line Q4 sales and above-consensus EPS, helped by lower-than-expected opex and share count, Arya said in a Sunday note.

Gross margins were ahead of the midpoint of guidance for the 12th straight quarter due to solid operational execution and improving product mix, the analyst said. 

Above-seasonal performance in the compute end market helped to offset macro weakness, Arya said. 

Arya also noted that free cash flow hit the highest levels since Q1 2010 and channel inventories, though increasing in Q4, remained within the targeted 11-13 weeks.

More importantly, ON expects channel inventory to remain within the normal range in the near term, the analyst said.

The company noted stabilization and a modest pickup in Greater China in recent weeks after the weakness seen since November, Arya said. 

The weakness was broad-based across all end markets, with particular softness in industrial and consumer end markets, according to BofA. 

Despite ON forecasting Q1 sales 4 percent below consensus, primarily due to China weakness, BofA expects EPS to trail estimates by only 1 cent due to lower operating expenditures and a lower share count.

ON expects the sequential growth in sales to resume in Q2, Arya said. 

The Price Action

ON Semiconductor shares were up 0.77 percent at $20.96 at the time of publication Monday. 

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