ON Semiconductor Corp (ON, Financial) has been making waves in the stock market with a daily gain of 4.25%, and a 3-month gain of 12.73%. Moreover, its Earnings Per Share (EPS) stands at 4.37. However, the question that remains is whether the stock is significantly overvalued. This article undertakes a comprehensive analysis of ON Semiconductor's valuation to answer this question. Read on to get a detailed insight into the company's financial health and prospects.
Company Overview
ON Semiconductor Corp (ON, Financial) is a leading supplier of power semiconductors and sensors, primarily catering to the automotive and industrial markets. It holds the second-largest market share in the global power chip industry and is the top supplier of image sensors for the automotive sector. The company is transitioning its focus towards emerging applications such as electric vehicles, autonomous vehicles, industrial automation, and renewable energy. With a stock price of $97.61, ON Semiconductor's market cap stands at $42.10 billion, which raises questions about its overvaluation.
Understanding the GF Value
The GF Value is a unique measure of a stock's intrinsic value, based on historical trading multiples, a GuruFocus adjustment factor, and future business performance estimates. It provides a benchmark for the fair trading value of the stock. ON Semiconductor (ON, Financial) is currently believed to be significantly overvalued based on the GF Value calculation. If the stock price is significantly above the GF Value Line, it indicates overvaluation, and its future return is likely to be poor. Conversely, if it is significantly below the GF Value Line, its future return will likely be higher.
Given that ON Semiconductor is significantly overvalued, the long-term return of its stock is likely to be much lower than its future business growth.
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Financial Strength Analysis
Investing in companies with poor financial strength can lead to a higher risk of permanent capital loss. Therefore, it's crucial to thoroughly examine a company's financial strength before deciding to invest in its stock. A good starting point is the cash-to-debt ratio, which for ON Semiconductor is 0.75, ranking it lower than 71.56% of 886 companies in the Semiconductors industry. However, the overall financial strength of ON Semiconductor is ranked 8 out of 10, indicating robust financial health.
Profitability and Growth
Companies with consistent profitability over the long term generally offer less risk to investors. ON Semiconductor has been profitable for 10 of the past 10 years, with an operating margin of 32.66%, ranking better than 94.23% of 936 companies in the Semiconductors industry. Its profitability rank is 9 out of 10, indicating strong profitability.
Growth is closely correlated with the long-term performance of a company's stock. ON Semiconductor's 3-year average revenue growth rate is lower than 50.64% of 865 companies in the Semiconductors industry. However, its 3-year average EBITDA growth rate of 40% ranks better than 72.4% of 768 companies in the same industry.
ROIC vs WACC
Comparing a company's Return on Invested Capital (ROIC) and the Weighted Average Cost of Capital (WACC) provides another perspective on its profitability. For ON Semiconductor, the ROIC is 28.94, surpassing its WACC of 11.3, indicating effective cash flow generation relative to the capital invested in its business.
Conclusion
In conclusion, despite being significantly overvalued, ON Semiconductor exhibits strong financial health and profitability. Its growth ranks better than 72.4% of 768 companies in the Semiconductors industry. To delve deeper into ON Semiconductor's financials, check out its 30-Year Financials here.
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