ON Semiconductor Corporation (NASDAQ:ON) shares are up more than 12.56% this year and recently increased 2.12% or $0.49 to settle at $23.57. Qorvo, Inc. (NASDAQ:QRVO), on the other hand, is up 6.67% year to date as of 01/12/2018. It currently trades at $71.04 and has returned 4.42% during the past week.
ON Semiconductor Corporation (NASDAQ:ON) and Qorvo, Inc. (NASDAQ:QRVO) are the two most active stocks in the Semiconductor – Broad Line industry based on today’s trading volumes. To determine if one is a better investment than the other, we will compare the two companies’ growth, profitability, risk, return, and valuation characteristics, as well as their analyst ratings and sentiment signals.
The ability to consistently grow earnings at a high compound rate is a defining characteristic of the best companies for long-term investment. Analysts expect ON to grow earnings at a 27.78% annual rate over the next 5 years. Comparatively, QRVO is expected to grow at a 13.70% annual rate. All else equal, ON’s higher growth rate would imply a greater potential for capital appreciation.
Profitability and Returns
Growth isn’t very attractive to investors if companies are sacrificing profitability and shareholder returns to achieve that growth. We will use EBITDA margin and Return on Investment (ROI), which control for differences in capital structure between the two companies, to measure profitability and return., compared to an EBITDA margin of 32.58% for Qorvo, Inc. (QRVO). ON’s ROI is 5.90% while QRVO has a ROI of 0.80%. The interpretation is that ON’s business generates a higher return on investment than QRVO’s.
Cash is king when it comes to investing. ON’s free cash flow (“FCF”) per share for the trailing twelve months was +0.55. Comparatively, QRVO’s free cash flow per share was +1.16. On a percent-of-sales basis, ON’s free cash flow was 5.97% while QRVO converted 4.86% of its revenues into cash flow. This means that, for a given level of sales, ON is able to generate more free cash flow for investors.
Liquidity and Financial Risk
Liquidity and leverage ratios are important because they reveal the financial health of a company. ON has a current ratio of 2.00 compared to 3.80 for QRVO. This means that QRVO can more easily cover its most immediate liabilities over the next twelve months. ON’s debt-to-equity ratio is 1.33 versus a D/E of 0.20 for QRVO. ON is therefore the more solvent of the two companies, and has lower financial risk.
ON trades at a forward P/E of 14.17, a P/B of 4.50, and a P/S of 1.84, compared to a forward P/E of 11.00, a P/B of 1.84, and a P/S of 3.11 for QRVO. ON is the cheaper of the two stocks on sales basis but is expensive in terms of P/E and P/B ratio. Given that earnings are what matter most to investors, analysts tend to place a greater weight on the P/E.
Analyst Price Targets and Opinions
A cheap stock is not necessarily a value stock. Most of the time, a stock is cheap for good reason. A stock only has value if the current price is substantially below the price at which it should trade in the future. ON is currently priced at a 4.06% to its one-year price target of 22.65. Comparatively, QRVO is -6.35% relative to its price target of 75.86. This suggests that QRVO is the better investment over the next year.
The average investment recommendation on a scale of 1 to 5 (1 being a strong buy, 3 a hold, and 5 a sell) is 2.20 for ON and 2.70 for QRVO, which implies that analysts are more bullish on the outlook for QRVO.
Risk and Volatility
Beta is an important measure that gives investors a sense of the market risk associated with a particular stock. A beta above 1 signals above average market risk, while a beta below 1 implies below average volatility. ON has a beta of 2.01 and QRVO’s beta is 0.96. QRVO’s shares are therefore the less volatile of the two stocks.
Insider Activity and Investor Sentiment
Short interest, or the percentage of a stock’s tradable shares currently being shorted, is another metric investors use to get a pulse on sentiment.ON has a short ratio of 3.10 compared to a short interest of 6.06 for QRVO. This implies that the market is currently less bearish on the outlook for ON.
Qorvo, Inc. (NASDAQ:QRVO) beats ON Semiconductor Corporation (NASDAQ:ON) on a total of 8 of the 14 factors compared between the two stocks. QRVO is growing fastly, has higher cash flow per share, higher liquidity and has lower financial risk. In terms of valuation, QRVO is the cheaper of the two stocks on an earnings and book value, QRVO is more undervalued relative to its price target. Finally, MXIM has better sentiment signals based on short interest.