Earnings Preview: ON Semiconductor

Elizabeth Pate of FBR Research wrote a note to clients on ON Semiconductor (ONNN) in her latest overview of the semiconductor components sector. Excerpts follow:

ON Semiconductor: Outperform, $14 Price Target

4Q earnings preview:
Recent checks show 4Q business trends likely tracking to guidance of flat to up 2% QOQ, in line with the consensus estimate. We believe PC, wireless, and, to a lesser extent, consumer-related demand remain robust in 4Q... We currently forecast 4Q07 revenues and EPS of $408 million and $0.21, respectively, in line with consensus estimates.

1Q guidance expectations:
We still think the Street is not factoring in enough 1Q seasonality for ON Semi, though the firm will likely mask this issue with its ADI acquisition. We think revenues should be modeled down 3% to 5% quarter over quarter on an organic basis. Then we think the ADI acquisition should layer on about 5 points of revenue growth on top of that. Net, 1Q revenues should be modeled flat to up 2% quarter over quarter. We currently forecast 1Q08 revenues and EPS of $413 million ... and $0.18, respectively, versus consensus estimates ... (which apparently are not factoring in about $17 million of Analog Devices related revenues).

ON Semi investment thesis:
We like shares of ONNN at current levels, as (1) we think meaningful AMIS-related cost savings now exist to drive another leg of margin expansion at ON Semi; (2) we think management's prior execution track record makes this transaction even more attractive than it otherwise would be; and (3) valuation multiples are too cheap to ignore at current levels, with the stock trading at 9x our forward EPS estimates and 1.8x our 2008 sales estimate.

ON Semi valuation methodology:
We believe ON's valuation metrics are now outright cheap. Our $14 price target for the stock is based on a 14x multiple of our forward EPS estimate (2H08 and 1H09), consistent with our prior valuation methodology. Historically, ONNN has traded within a range of 10x to 20x its forward EPS estimate.