In only about two months, ON Semiconductor (ON) shares have appreciated another 30%, roughly doubling the return of the SOX index. A strong beat-and-raise quarter doesn’t explain the outperformance, as peers/rivals like Infineon (OTCQX:IFNNY), STMicro (STM), and Texas Instruments (TXN) had those too.
I believe the performance of ON shares is testament to just how important management and margins are to investors. While new CEO Hassane El-Khoury hasn’t had the opportunity to conduct a full review (there will be an August analyst day), his initial takes on his plans for ON are pretty much exactly what investors wanted to hear – prioritize higher-margin value-added products, get out of some lower margin businesses, rationalize the manufacturing base, and reinvest in growth.
I said before that I thought a better-run ON could see around nine points of long-term margin improvement. I’m currently modeling a bit less than that, but there’s still room for outperformance and I think ON has a credible line of sight to adjusted FCF margins of 20% or more over time. A lot of this is now in the share price, though, and while I do still believe that the combination of growth ramps (in auto and industrial, especially) and margin expansion is a powerful one, I don’t see the upside I did before.
Read the full article here:
ON Semiconductor Highlights The Importance Of Management And Margins
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