3 reasons to buy ON Semiconductor stock like there’s no tomorrow

One of the biggest complaints of growth investors is the need for more growth stock candidates at reasonable valuations. Such situations rarely arise when a company is firing on all cylinders.

However, you can often buy a stock at a reasonable valuation when the market has not been in love with it due to temporary weakness in its end markets. This seems to be the case with ON Semiconductor (ON -5.15%). The stock deserves a closer look from growth-oriented investors, and here are three reasons why.

Long-term growth story

The investment case for the stock is based on driving pivot to the automotive and industrial end markets. ON Semiconductor’s smart technology is used in electric vehicles (EVs) and hybrid electric vehicles (HEVs) and helps reduce their weight, make them run longer and charge faster.

Meanwhile, the company’s advanced sensing technologies are vital for smart factories and facilities. They are also used in the automotive industry in advanced driver assistance systems (ADAS) and automated driver systems. Management continues to structure the company for long-term growth in these end markets.

The slowdown is temporary

It’s fair to say that none of these end markets are in fighting shape in 2024—at least not relative to expectations for the year. Relatively high interest rates have slowed electric vehicle sales and automakers have cut development spending. The situation is similar in the industrial sector, with a sharp slowdown in industrial automation orders.

The chart below shows the nature of the decline in its core industrial and automotive markets.

Data source: ON Semiconductor.

That said, the reasons for the drop in revenue appear to be temporary and relate to a high interest market. With lower interest rates on the way, EV/HEV sales should increase, leading to investment in production growth. As a demonstration of the automotive industry’s commitment to investing in electric vehicles, ON Semiconductor recently entered into a multi-year agreement with Volkswagen to be the leading supplier of power-box solutions.

Additionally, there has been a slowdown in factory automation spending, evidenced by the order patterns of companies with exposure such as Emerson Electric and Rockwell Automation. This combination of slowing growth and automation product distributors running out of inventory instead of placing new orders appears temporary.

There’s a reason companies like Emerson Electric, Siemensand Honeywell are making automation a key focus of their growth plans. Factory automation allows developed countries to compete on cost with low-cost countries in manufacturing.

Image source: Getty Images.

Attractive valuation

There’s no way to avoid the elephant in the room: ON Semiconductor’s sales are declining and are set to decline in 2024. Furthermore, CEO Hassane El-Khoury is talking about an “L-shaped” comeback, meaning it will there was a slow and gradual return. steep decline.

The good news is that a conservative outlook is built into the stock’s valuation.

To indicate the company’s attractive valuation, here’s a look at some standard valuation multiples using the consensus of Wall Street analysts. Those are excellent multiples for a growth stock going through a revenue and earnings trough in 2024, meaning the market doesn’t credit in the Wall Street consensus. In the latter case, EV is enterprise value (market cap plus net debt) divided by earnings before interest, taxes, depreciation and amortization (EBITDA).

Data source: marketscreener.com, author’s analysis.

The market has reason to doubt the numbers. No one can be entirely comfortable in a company with declining sales, but if the market is wrong, then the growth potential is significant.

A stock to buy?

Let’s say you believe the future of the automotive sector lies in EVs/HEVs, ADAS and automated driving systems, rather than traditional internal combustion engines (ICEs). In that case, you might think ON Semiconductor has a bright future — not least because it generates far more content per vehicle on EVs than on ICE-powered vehicles.

Image source: Getty Images.

Moreover, the stock will be attractive if you like the megatrend towards factory automation, renewable energy and electric vehicle charging networks.

These industries will not recover quickly. That said, the fundamentals — clean energy (EVs, etc.) and increased manufacturing productivity through automation investments — are in place.