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Despite Debt Burdens Street Cheers for onsemi-GTAT Merger
Stock Analysis & Ideas

Despite Debt Burdens Street Cheers for onsemi-GTAT Merger

I have a neutral stance on ON Semiconductor (ON), or onsemi, due to its ability to gamble in the acquisition space at a time when its debt is more than twice its cash reserve.

There is no doubt about the fact that acquisitions have historically helped ON tap new markets and diversify its business. However, things are very different now. In the second quarter of 2021, ON had total debt (including the current portion) of $3.11 billion against cash and cash equivalents of $1.09 billion.

On August 25, ON agreed to acquire GT Advanced Technologies (GTAT) for $415 million. The company plans to finance the acquisition with its revolving credit and cash balances, which may burden its already heavily leveraged balance sheet. (See ON stock chart on Tipranks)

Possible Rationale and Outcomes of the Acquisition

Nonetheless, the acquisition may have more pros than cons. Notably, GTAT is a silicon carbide (SiC) and sapphire materials supplier, which will help ON rapidly meet the rising demand for SiC products in areas like power applications, especially in the Automotive and Industrial end markets. The company expects to help GTAT scale its operations by providing its manufacturing expertise, resulting in faster development of SiC materials.

The acquisition is expected to have no material impact on ON’s top-line and is likely to be slightly dilutive to the earnings per share (EPS) in the first year after the transaction closes. Nonetheless, GTAT will be accretive to the EPS from the second year onwards.

Meanwhile, Needham analyst Rajvindra Gill seems to be excited with this decision. His bullish sentiment reflected on his reinforcement of a Buy rating on the stock with a price target of $60. “We view these developments as positive for Automotive and Industrial segment top-line growth,” he explained.

Gill observed that with this acquisition, ON aspires to reduce the time-to-market (TTM) and increase the supply of materials available to customers. He believes that the acquisition will boost the company’s margins over the years.

Traction inverters are most in need of SiC materials. Notably, up to 20% of traction inverters are expected to be made from SiC materials by 2025.

Gill noted, “Overall, SiC is expected to be a $1B market by 2025, with high demand for its energy density, faster switching, and higher breakdown voltage characteristics.”

The Wall Street also seems optimistic on the stock and has a Strong Buy consensus based on 17 Buys, 2 Holds, and 1 Sell. The average ON price target of $54.05 implies 22.8% upside potential from current levels.

To find good ideas for stocks trading at attractive valuations, visit TipRanks’ Best Stocks to Buy, a tool that unites all of TipRanks’ equity insights.

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