ON Semiconductor Corp (ON, Financial) encountered a daily loss of -16.69% and a 3-month loss of -32.89%, with an Earnings Per Share (EPS) (EPS) of 4.37. This article aims to analyze whether this stock is fairly valued. Let's delve into a detailed valuation analysis of ON Semiconductor.
A Glimpse into ON Semiconductor
ON Semiconductor Corp (ON, Financial), a leading supplier of power semiconductors and sensors, primarily caters to the automotive and industrial markets. It holds the second-largest position globally as a power chipmaker and is the top supplier of image sensors for the automotive market. The company's business strategy revolves around a hybrid manufacturing model for flexible capacity, focusing on emerging applications such as electric vehicles, autonomous vehicles, industrial automation, and renewable energy. The current stock price stands at $69.58, and the GF Value, a proprietary measure of the stock's fair value, is $67.52.
Understanding the GF Value of ON Semiconductor
The GF Value is a unique measure of a stock's intrinsic value, computed based on three key factors: historical multiples (PE Ratio, PS Ratio, PB Ratio, and Price-to-Free-Cash-Flow), a GuruFocus adjustment factor based on the company's past returns and growth, and future business performance estimates. The GF Value Line on our summary page provides an overview of the fair value at which the stock should ideally trade. If the stock price significantly surpasses the GF Value Line, it is likely overvalued, indicating poor future returns. Conversely, if it is substantially below the GF Value Line, it may be undervalued, suggesting high future returns.
Based on GuruFocus' valuation method, ON Semiconductor appears to be fairly valued. With a market cap of $30 billion, the stock's fair value is estimated considering historical multiples, an internal adjustment based on past business growth, and analyst estimates of future business performance. As ON Semiconductor is fairly valued, the long-term return of its stock will likely be close to the rate of its business growth.
Assessing the Financial Strength of ON Semiconductor
Financial strength is a critical factor to consider when investing in a company to avoid the risk of permanent capital loss. Key indicators of a company's financial strength include its cash-to-debt ratio and interest coverage. ON Semiconductor has a cash-to-debt ratio of 0.75, ranking worse than 71.21% of 903 companies in the Semiconductors industry. However, its overall financial strength is 8 out of 10, indicating strong financial health.
Profitability and Growth of ON Semiconductor
Profitability is a vital aspect to consider when investing in a company. A company with high profit margins is generally a safer investment than one with low profit margins. ON Semiconductor has been profitable for 10 out of the past 10 years. Over the past twelve months, the company had a revenue of $8.40 billion and an EPS of $4.37. Its operating margin is 32.66%, ranking better than 94.44% of 953 companies in the Semiconductors industry. Overall, GuruFocus ranks the profitability of ON Semiconductor at 9 out of 10, indicating strong profitability.
Growth is another important factor in the valuation of a company. A faster-growing company creates more value for shareholders, especially if the growth is profitable. The 3-year average annual revenue growth of ON Semiconductor is 11.9%, which ranks worse than 50.8% of 874 companies in the Semiconductors industry. However, the 3-year average EBITDA growth rate is 40%, ranking better than 72.61% of 774 companies in the Semiconductors industry.
ROIC vs WACC
Another method of determining the profitability of a company is to compare its return on invested capital (ROIC) to the weighted average cost of capital (WACC). ROIC measures how well a company generates cash flow relative to the capital it has invested in its business. WACC is the rate that a company is expected to pay on average to all its security holders to finance its assets. When the ROIC is higher than the WACC, it implies the company is creating value for shareholders. For the past 12 months, ON Semiconductor's ROIC is 28.95, and its cost of capital is 12.27.
Conclusion
Overall, the stock of ON Semiconductor appears to be fairly valued. The company's financial condition is strong, and its profitability is robust. Its growth ranks better than 72.61% of 774 companies in the Semiconductors industry. To learn more about ON Semiconductor stock, you can check out its 30-Year Financials here.
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This article, generated by GuruFocus, is designed to provide general insights and is not tailored financial advice. Our commentary is rooted in historical data and analyst projections, utilizing an impartial methodology, and is not intended to serve as specific investment guidance. It does not formulate a recommendation to purchase or divest any stock and does not consider individual investment objectives or financial circumstances. Our objective is to deliver long-term, fundamental data-driven analysis. Be aware that our analysis might not incorporate the most recent, price-sensitive company announcements or qualitative information. GuruFocus holds no position in the stocks mentioned herein.
