Hassane El-Khoury is already having a noticeable impact on the business, with good progress already in hand on multiple short-term projects meant to improve margins. Better still, El-Khoury laid out an entirely credible longer-term strategy to “premium-ize” the company’s mix, leverage above-average growth opportunities in higher-value products, and further improve the structural margins of the business.
One of my common refrains is that successful turnarounds can go a lot further than investors initially think, and I think that’s the case here. I do see some risk when the current cycle decelerates (lead times are 2x more above long-term averages), but that would just be some short-term noise. Longer term, I see ON potentially generating $10B in annual revenue with 20%+ FCF margins and an operating margin that could support a 4x or better revenue multiple.
With a strong run in the shares since late July, they’ve now only just exceeded the performance of the SOX index since my last update, though comps like Infineon (OTCQX:IFNNY), STMicro (NYSE:STM), and Texas Instruments (NASDAQ:TXN) have done a bit worse. I see no reason why the shares shouldn’t trade above $50 in the short term, with a high single-digit long-term annualized return potential on estimates that still have room to be exceeded.
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ON Semiconductor Offering An Exciting Growth And Margin Leverage Story
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