On Monday, Citi made a significant adjustment to its outlook on ON Semiconductor (NASDAQ:ON), downgrading the stock from Buy to Neutral and lowering the price target from $85.00 to $77.00.
The revision comes amid growing concerns over the Silicon Carbide market, which represents 12% of the company's projected 2024 sales. According to the firm, this sector is not only experiencing a slowdown in growth, but also facing declining prices, which could lead to reduced margins for ON Semiconductor.
The firm expects that ON Semiconductor's stock multiple will encounter challenges as long as the Silicon Carbide business continues to be a significant contributor to the company's revenue and earnings. This expectation is informed by historical instances where businesses have commoditized or disappeared, resulting in lower valuation multiples. The firm cited the example of Analog Devices (NASDAQ:ADI)' business with Apple (NASDAQ:AAPL) a decade ago, which saw a similar decline.
Previously, ON Semiconductor's valuation multiple had expanded from 10 times to 20 times earnings per share (EPS) on the assumption that the Silicon Carbide market was a high-growth, high-margin segment. However, with evidence now suggesting a market slowdown and pricing pressures, the firm anticipates a negative impact on ON Semiconductor's multiple until the company potentially exits this line of business.
In adjusting the price target, Citi has applied a reduced multiple of 16 times the projected 2025 EPS, down from the previous 18 times. This new target reflects the anticipated lower valuation multiple. The firm also suggests that even if ON Semiconductor's broader semiconductor business recovers, its stock multiple may continue to underperform compared to its peers until issues surrounding the Silicon Carbide business are resolved.
In other recent news, ON Semiconductor has made significant strides in its industry with the acquisition of SWIR Vision Systems, a move set to enhance its sensor technology. The company also announced a major restructuring plan under its "Fab Right" strategy, which involves the consolidation of nine sites and a reduction of approximately 1,000 employees globally. This restructuring process is expected to be completed by 2025.
Several analyst firms, such as TD Cowen, Mizuho, and Benchmark, have maintained a Buy rating on ON Semiconductor's shares, albeit with reduced price targets. Rosenblatt Securities, on the other hand, has kept a Neutral rating while also reducing the stock's price target.
The acquisition of SWIR Vision Systems, the significant restructuring plan, and the analyst adjustments are recent developments for ON Semiconductor.
InvestingPro Insights
As investors digest the recent downgrade of ON Semiconductor by Citi, it's essential to consider the company's current financial health and market position. InvestingPro data indicates that ON Semiconductor has a market cap of $33.07 billion and is trading at a P/E ratio of 15.4, which is relatively low when considering its near-term earnings growth potential. Additionally, the company's PEG ratio, which stands at 0.77, suggests that the stock may be undervalued relative to its earnings growth.
Despite concerns over the Silicon Carbide market, ON Semiconductor remains a prominent player in the Semiconductors & Semiconductor Equipment industry. The company's recent performance also shows a strong return over the last three months, with a 17.11% price total return, which could indicate resilience in its stock price amid market fluctuations. Moreover, with a solid operating income margin of 30.88% for the last twelve months as of Q1 2024, the company demonstrates its ability to maintain profitability.
For those considering further analysis, there are additional InvestingPro Tips available that delve deeper into ON Semiconductor's financials and market outlook. Readers can explore these insights and potentially uncover investment opportunities by using the coupon code PRONEWS24 to get up to 10% off a yearly Pro and a yearly or biyearly Pro+ subscription. With a total of 13 InvestingPro Tips listed on the platform, investors can gain a comprehensive understanding of the company's financial standing and future prospects.
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