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On Semiconductor Upgraded to Strong Buy on Buyout Synergy

On Jul 5, ON Semiconductor Corp. ON was upgraded to a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Why the Upgrade?

The upgrade can primarily be attributed to the successful integration of Fairchild, which the company acquired in Sep 2016. The acquisition has helped the company to strengthen its foothold in the semiconductor industry with a clear focus on smartphone, automotive and industrial end markets.

The positively revised synergy run rate will be an additional boost for the company’s shares, which have marginally underperformed the Zacks Semiconductor-Analog and Mixed industry on a year-to-date basis. While the industry gained 12.6%, the stock returned 12.1% over the same time period.

Growth Catalysts

ON Semiconductor revised its annual synergies run rate from the Fairchild acquisition to $180 million, up from the previous target of $160 million for 2017. For 2018, the same was raised to $220 million from $200 million. Management also expects strong revenue growth contribution from Fairchild in the near to mid-term. Total annual synergies from Fairchild are now anticipated to be $245 million, up from $225 million, which it expects to achieve by the end of 2019.

Moreover, improving end markets is something that the company can bank on. Growing demand and greater adoption of ADAS related applications have given ON Semiconductor a significant growth opportunity in the automotive market.

Positive guidance is another driving factor. ON Semi now forecasts revenues to be in the range of $1.28–$1.34 billion in second-quarter 2017. Non-GAAP gross margin is projected to be in the range of approximately 34.7–36.7%, while operating expenses are estimated to be in the range of $281–$295 million.

We believe that the company’s diversified product and customer base along with improving end-markets and positives from the Fairchild acquisition will definitely help it gain momentum and improve its top line going forward.

Key Picks

A few other stocks worth considering in the broader technology sector include MaxLinear MXL, Microchip Technology MCHP and Applied Materials, Inc. AMAT. All three sport a Zacks Rank #1.

The long-term earnings growth rate for MaxLinear, Microchip Technology and Applied Materials is projected to be 17.5%, 14.4% and 16.6%, respectively.

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