KeyBanc Upgrades ON Semiconductor Citing Expected Acquisition Performance

KeyBanc analysts Michael McConnell and Hans Chung have upgraded their rating of ON Semiconductor Corp (NASDAQ: ON) to Overweight, citing increased content per vehicle from ADAS penetration, considerable EPS accretion from the acquisition of FCS and upcoming content expansion and share gains in Skylake notebook platform. The two analysts established a price target of $13.00.

The brokerage thinks that ADAS is an underappreciated future content driver for ON Semiconductor. They added, "ON has 70 percent automotive image sensor market share and three year design win visibility, and we estimate ADAS could drive ON's image sensor content over 3x to $28 per vehicle in the next three years, driving over $0.20 of incremental EPS over the same period. Fairchild acquisition is likely to exceed targeted synergies of $150 million. ON remains of $150 million in cost synergies from the Fairchild acquisition, equating to EPS accretion of $0.35."

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The two analysts believe ON did not include possible manufacturing synergies ($20 million to $60 million of cost savings per fab) in its guidance, which they estimate could fuel $0.05–$0.14 of additional EPS accretion for every fab closure. Furthermore, KeyBanc thinks Skylake tailwinds should finally materialize given Broadwell inventory depletion.

The brokerage elaborated that given recent signs of inventory reductions of Broadwell-based notebooks at PC OEMs, the analysts expect ON's content and share gains in Skylake to begin materializing in 2H2016. The analysts estimate the Skylake platform should drive an incremental $110 million in revenue and $0.03 in EPS to our model.

At time of writing, ON Semiconductor was up 2.65 percent at $10.06.