Analyst Note
| William Kerwin |We're raising our fair value estimate for narrow-moat Onsemi to $48 per share from $38 after the firm provided third-quarter results and fourth-quarter guidance above our expectations. Following its August 2021 analyst day and strong execution throughout 2021, we have greater confidence in the firm’s ability to achieve management’s ambitious 2025 financial targets, and we’re raising our long-term outlook for both sales growth and margin expansion. While we think Onsemi is benefiting from a favorable short-term supply environment, its ability to execute amid automotive production declines, inflationary pressure, and continued COVID-19 effects demonstrate structural progress toward being a less cyclical company, in our view. We think CEO Hassane El-Khoury’s strategy is clearly driving the firm in a more valuable direction, but we still believe it faces considerable execution risk in achieving lofty growth and profitability targets. To us, the current market price implies linear progress toward all the firm’s targets, and we are still uncertain about how the new-look company might fare during a cyclical downturn. After shares popped more than 10% with the release, we continue to view them as overvalued.