ON Semiconductor’s Earnings Just Broke Records: Here’s the Trade

ON Semiconductor (ON) released the firm’s second quarter financial performance on Monday morning. The numbers published were not just good, they broke records. For the three month period ending July 1st, ON Semiconductor posted adjusted EPS of $1.34 (GAAP EPS of $1.02) on revenue of $2.085B.

While the adjusted EPS print was good for annual growth of 112.7% and the GAAP EPS print good for annual growth of 142.9%, the revenue print was not only good enough for a new record, but good enough for year over year growth of 25.1%.

Beyond that, ON posted a gross margin of 49.7%, operating margin of 28.0% (up 1,110 basis points) and record adjusted operating margin of 34.5% (up 1,490 basis points). Free cash flow for the period did drop to $202.7M from $383.2M for the one year ago period, as purchases of property, and equipment more than doubled from $104.8M to $218.1M.

Segment Sales Performance

PSG (Power Solutions Group), which produces analog, discrete, module, and integrated semiconductor products… experienced 25% sales growth to $1.057B.

ASG (Advanced Solutions Group), which designs and develops advanced logic products with specific applications… experienced 18% sales growth to $716.7M.

ISG (Intelligent Sensing Group), which designs and develops metal oxide sensors, signal processors and photon detectors… experienced 44% sales growth to $311.3M.

Current Quarter Outlook

For the firm’s third quarter, ON Semiconductor sees revenue printing in a range spanning from $2.07B to $2.17B, which at the mid-point would be good for year over year growth of 21.7% and is above the Wall Street consensus view of $2.01B.

Gross margin is seen at 48% to 50%. Total expenses are seen at $325M to $340M including $6M in special items. Adjusted EPS is projected at $1.25 to $1.37, which moves the mid-point well above the $1.26 that Wall Street was looking for. GAAP EPS is seen at $1.23 to $1.35.

Balance Sheet

ON Semiconductor ended the period with a net cash position of $1.792B and current assets of $4.785B. These two entries are up significantly over six months. Inventories ended the quarter at $1.563B, which is above the ON Semiconductor norm, but not to a significant degree. Current liabilities are up more modestly to $1.713B including $165.2M in long-term debt labeled as “current.” This leaves the firm with a current ratio of 2.79, which is very healthy. Ex-inventories, the firm’s quick ratio comes to a still quite robust 1.88.

Total assets add up to $10.789B including “goodwill” and other intangibles that amount to $2.268B or 21% of total assets. That’s higher than I like, but certainly not outlandish by today’s standards. Total liabilities less equity comes to $5.379B including $3.047B in long-term debt. I would like to see this number reduced, but this is a clean balance sheet. ON Semiconductor will have no problem meeting short to medium-term obligations.

My Thoughts

The quarter was excellent. Cash flows are flowing. Guidance was solid. The balance sheet is in good shape. The stock closed on Friday trading at 13 times forward looking earnings, therefore this is not an expensive equity. Yet, the stock sold off hard (-5.3%) ahead of Monday’s opening bell, and remained lower in early trading.

That either means that investors see a glut in supplies of automotive chips which are a large part of what ON Semiconductor does. Either that, or investors expect consumers to back away from purchasing and leasing new vehicles now that the economy has gone into recession. That’s a distinct possibility.

These shares have been trading in a slightly downward sloping trading range pretty much all year. Even on Friday’s run, the stock respected the upper trend line, as both Relative Strength and the Full Stochistics Oscillator betrayed a technically overbought condition. Does one buy this dip? I think maybe one can as long as one stays fully cognizant of where the stock is trading and where the 200 day SMA ($58) is.

As traders take profits, it will be key to see if portfolio managers step in at or above that line. I think an investor/trader holding cash could proceed in this way… adding down to $58. That said, should that investor see these shares crack that level, be prepared to cut this name loose, regardless of profit/loss.