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ON Semiconductor Isn't Immune to China's Slowdown, but It's Still Pretty Good

An artist's illustration of connected devices. Pictures of everyday objects like coffee mugs, cameras, and cars are illustrated inside of honeycomb-shaped cells.

Semiconductor stocks had a rough go of it last year, and ON Semiconductor (NASDAQ: ON) was no exception. Shares ended 2018 down 21%.

It's not that there was anything wrong with ON's business per se; in fact, business continued to grow at a healthy pace, capping off the year with a 9% sales gain in the fourth quarter alone. Investors chose to fret over the trade spat between the U.S. and China, and it seems the slowing economy across the Pacific is proving the worry justified.

Nevertheless, shares have rallied since the fourth-quarter report on strong results and management's outlook that the China problem will be nothing more than a speed bump.

A solid year by any standard

In 2017, ON's stock soared as it reaped the benefits of its acquisition of former peer Fairchild. The bottom line continued to gain as the company integrated operations and cut expenses, plus got a boost from generally rising demand for connectivity chips, sensors, and power management devices across the industries ON serves.

Metric Full-year 2018 Full-year 2017 YOY Change
Revenue $5.88 billion $5.54 billion 6%
Gross profit margin 38.1% 36.7% 1.4 p.p.
Operating profit $847 million $682 million 24%
Adjusted earnings per share $1.96 $1.46 34%

YOY = year over year. P.p. = percentage point. Data source: ON Semiconductor.

2018's modest gains -- at least in comparison with 2017 -- were a big reason for the stock's decline. Business continues to climb, though, as demand for technology in automobiles, industrial equipment, and power management in telecom and data centers keeps growing. Higher profit margins on newer tech product is also helping the semiconductor manufacturer make the most of its positive bottom-line momentum.

It's all about the future

But what about China? CFO Bernard Gutman offered these comments on the situation:

Since our last earnings call in November of last year, we have noticed a significant slowdown in demand from Greater China region. This slowdown further accelerated early this year, when we noticed a sharp slowdown in bookings, especially from distribution channel. This steep decline in bookings has reversed course during [the] last couple of weeks, and we have seen modest pickup.

Soft sales in the world's most populous country should equate to an overall sales decline of 1% at worst in the first quarter of 2019, according to management's projections. So, no big deal, right? However, since sales surged 9% in the second quarter last year, management didn't offer up a return to overall growth in the spring quarter, but did say it appeared revenue would improve sequentially going forward.

An artist's illustration of connected devices. Pictures of everyday objects like coffee mugs, cameras, and cars are illustrated inside of honeycomb-shaped cells.

Image source: Getty Images.

Here's the upshot: ON said it sees business rebounding during the back half of 2019. Plus, even if sales sputter, management said it expects profit margins to increase as ON continues to wean itself off of commoditized goods and sharpen its focus on more advanced tech. Wall Street seems to agree. The company's 12-month trailing price-to-earnings ratio (PE) is currently at 15.0, compared to a forward PE of just 12.5 -- implying analysts believe the bottom line will continue to get bigger in the quarters ahead.

Of course, the ride could get bumpy along the way, especially as politics around trade and economics continue to develop. However, the need for ON's technology in big industries is on solid footing for the long term.

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Nicholas Rossolillo and his clients own shares of ON Semiconductor. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy .

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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