ON Semiconductor's Transformation and SiC Rollout Positions it for High-Growth Opportunities

ON Semiconductor, a leading provider of semiconductors for power and data management, is poised to capitalize on high-growth opportunities in the automotive and industrial end markets, according to a recent analysis by White Star Research. This follows a successful slimming down of the business and the rollout of its third-generation silicon carbide (SiC) chips. ON Semiconductor's management has revealed their new midterm guidance until FY27, aiming for a revenue growth CAGR of 12%-10%. The company also aims to continue the significant margin expansion of recent years, with gross margins expected to reach 53%-50% (FY22: 49%), operating margins rising to 40%-35% (FY22: 33.4%) and FCF margins climbing to 30%-25% (FY22: 19.6%). The company has undergone a transformation since a management change in 2020, focusing on high-value-add innovation in automotive and industrial end markets. This focus, along with strong post-Covid demand, has led to a strong expansion in margins and industry-leading returns on equity, assets, and total invested capital. ON Semiconductor's FAB LITE model has enabled the company to navigate the downcycle and inventory buildup in semiconductor markets better than competitors. The company is also transitioning to a FAB RITE model to drive SiC rollout, focusing on strategic brownfield expansions in various countries. ON Semiconductor is already a global leader in SiC chips, holding a 14% market share and targeting a 2027 market share of 40%. SiC is a third-generation semiconductor material ideal for application in power electronics and grid electrification appliances. The company's strategy also includes a focus on cash generation and shareholder returns. The company has a net leverage of 0.3x with a BB+/Ba1 credit rating, and it has used strong cash generation following Covid-19 to delever and buy back shares. Midterm guidance aims for 50% of FCF to be returned to shareholders with share buybacks of $3bn authorized until 2025. While the company is well-positioned for growth, potential risks include China sanctions, the exit of GaN business, and the current downcycle and inventory buildup in semiconductor markets due to the global economic downturn. Despite these risks, White Star Research rates ON Semiconductor as a buy with a price target of $118, citing the company's strong competitive position, high growth potential, and successful management initiatives.