The price of Onsemi (NASDAQ: ON) is down 40% from its high but won’t be for long because end-market normalization and mounting demand for its high-power semiconductor applications will collide in 2025. While the 2024 results are lackluster, the Q3 results align with the expectation growth will resume as soon as the first quarter of F2025 and accelerate as the year progresses. The takeaway for investors is that Onsemi is a profitable semiconductor company that pays its shareholders generously while building value simultaneously. With revenue and earnings growth in the picture, capital returns are safe for 2025 and likely to grow, providing an additional tailwind for share prices.
Onsemi Q3 Results Improve Market Sentiment
Onsemi had a much-better-than-feared Q3, with strength in all segments aiding outperformance on the top and bottom lines. The company’s $1.762 billion in revenue is down 19% compared to last year but up sequentially on improved demand and 70 basis points above the consensus forecast reported by MarketBeat. All three segments contracted compared to last year. However, the Power Solutions Group contracted by only 1% sequentially, offset by 1% growth in Analog & Mixed Signal and 11% in Industrial.
Margin news is the same. The company experienced margin pressure due to revenue deleverage but delivered better-than-feared results, sequential improvement, and outperformance on the bottom line. The $0.93 in GAAP earnings beat by $0.02 and the adjusted $0.99 by $0.07 or 760 basis points, sustaining a robust cash flow and capital return outlook compounded by solid guidance.
The company's guidance for Q4 isn’t robust, aligning with the analysts' consensus forecast, but it is solid. The company’s guidance puts the FY2024 adjusted EPS total at $0.04 or 100 bps above analysts' forecasts and is likely cautious, given the momentum shown in Q3. PSG sales may remain sluggish, but AMG and ISG will likely continue to grow.
Among the long-term opportunities for the company and investors is to gain market share in the SiC chip industry. The company’s chips are more expensive than competitors but are considered superior because of the manufacturing process. Onsemi is unique because its full-stack approach controls manufacturing from end to end, providing optimized efficiency and superior reliability compared to others that outsource their wafers.
Onsemi: Own It for the Balance Sheet and Capital Return
Onsemi’s position in the SiC microchip industry aside, the capital return and balance sheet are among the top reasons to own it. The company has a fortress position with cash and assets rising, liabilities declining, and equity rising despite the increase in treasury shares. Total leverage is low at 0.62x equity, long-term debt leverage is equally low at 1x cash, and equity is up 10% YTD at the end of the quarter. The company doesn’t pay dividends, choosing to buy back shares, and does so at a robust pace. Activity in Q3 reduced the count by 4.2% on average for the quarter and 3.4% year-to-date, with additional buybacks expected in Q4 and F2025.
The post-release price action was also robust, with shares rising by 3% and then falling by 5% to open with a 5% loss. The move is due to the lackluster Q4 guidance but sets up a deep-value opportunist. Onsemi trades at roughly 15x its next year's earnings and is a value compared to the broad market and peers. Analysts rate Onsemi as a Moderate Buy and forecast a 20% price increase at the consensus.
