Business Strategy and Outlook
It is seen Onsemi is a power chipmaker aligning itself to the differentiated parts of its portfolio in order to accelerate growth and margin expansion. It is probable Onsemi to outpace the growth of its underlying markets over the next five years as it tailors its portfolio of transistors, analog chips, and sensors to pursue secular trends toward electrification and connectivity that allow it to sell into new sockets. Specifically, Onsemi is the top supplier of image sensors to automotive applications like advanced driver-assist systems, or ADAS, and its semiconductors enable power management and conversion in electric vehicles, or EVs, and renewable energy–all of which is likely to keep Onsemi’s sales growth above that of the broader semiconductor industry.
It is viewed onsemi will be vulnerable to modest cyclicality in the short term, but think its portfolio realignment will lend itself to more durable returns through a cycle. The firm’s increased focus on sticky verticals, as well as its differentiated sensor and silicon carbide technologies, contribute to Analysts narrow economic moat rating. Onsemi’s bread and butter historically was in more commodity like discrete power chips, but it is probable for it to focus on higher-value applications in the automotive and industrial end markets going forward and in turn earn more consistent returns on invested capital.
It is seen Onsemi will focus on expanding margins over the medium term. Management invested heavily in pruning and improving its manufacturing efficiency in 2018 and 2019, and it is alleged it see the fruits of these efforts after 2022 when Onsemi fully acquires its first 12-inch fab. It is also alleged the firm will focus its investments on the automotive and industrial markets–higher growth and higher margin than its legacy consumer and smartphone markets. It is seen management faces execution risk in hitting its lofty goal of 48%-50% adjusted gross margin, but expect both a focus on higher-margin verticals and an improved manufacturing footprint to get it to the high-40% range in the next five years–from a previous midcycle margin below 38%.
Financial Strength
It is probable Onsemi’s primary financial focus in the medium term will be generating free cash flow and paying down debt after hefty investments over the last five years. Onsemi took on more than $2 billion debt for its 2016 Fairchild acquisition, and also committed over $1 billion in capital expenditures between 2018 and 2019 to improve its manufacturing footprint (shuttering inefficient fabs and purchasing equipment for its new 12-inch fab). Management has a stated goal of holding off on new share repurchases until the firm meets its 2:1 net leverage goal (net debt/adjusted EBITDA). As of the end of fiscal 2021, Onsemi held $1.4 billion in cash compared with $3.1 billion in total debt, putting its year-end net leverage at 0.88 times. It is projected Onsemi to generate an average of $2 billion in free cash flow through 2026-even while committing roughly 10% of sales to capital expenditures-and seen the firm can use its extra cash to resume repurchases. If Onsemi were to come into a liquidity crunch, it has $1.3 billion available (as of end-fiscal 2021) under its $2 billion revolving credit facility.
Bulls Say’s
- Onsemi’s image sensors are best of breed in the automotive market, with a leading market share in high-growth, mission-critical applications like ADAS.
- It is viewed Onsemi will continue to outgrow its underlying markets and the broader semiconductor industry by selling greater dollar content into applications like cars and servers, which also helps stave off its vulnerability to market cycles.
- Onsemi is focusing its portfolio on the automotive, industrial, and cloud markets, which is seen, will expand margins and create stickier customer relationships.
Company Profile
Onsemi is a leading supplier of power and analog semiconductors, as well as sensors. Onsemi is the second-largest global supplier of discrete transistors like insulated gate bipolar transistors, or IGBTs, and metal oxide semiconductor field-effect transistors, or MOSFETs, and also has a significant integrated power chip business. Onsemi is also the largest supplier of image sensors to the automotive market, targeting autonomous driving applications. The firm is concentrated in and focused on the automotive, industrial, and communications markets, and is reducing its exposure to the consumer and computing markets.
(Source: MorningStar)
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