Needham analyst Quinn Bolton reiterated ON Semiconductor Corp ON with a Buy rating and a $92 price target.

The analyst hosted a virtual NDR with Thad Trent, CFO, and Parag Agarwal, VP of IR and Corporate Development, and came incrementally bullish towards ON shares ahead of the anticipated cyclical recovery.

Bolton said cancellations and pushouts peaked late last year and have returned to normal.

The company has seen stabilization in its traditional industrial business, which was first to feel the effects of the downturn in the second half of 2022.

Inventory digestion in automotive and energy infrastructure will likely last another 1-2 quarters, but shipments should return to end-consumption levels late this year, as per the analyst.

He said that internal inventory levels are at target levels, and the dollar value of distributor inventory is historically low.

Bolton expects utilization rates to respond quickly as demand recovers, driving a higher gross margin.

On the NDR, management reiterated that the gross margin should increase by 15-20 bps for every point increase in utilization rate.

The analyst expects On Semiconductor to benefit from EV and SiC shipment inflections, proliferation of automotive Image Sensors, Data Center voltage transitions, an Alternative Energy rebound, and continuous internal improvements.

The analyst noted that management’s outlook for an “L-shaped” recovery carries more upside than downside risk.

Bolton revenue estimates for fiscal years 2025 and 2026 suggest utilization rates should recover to the high 70% to 80% range by the year ending 2026.

The increase accounts for nearly 300bps of gross margin expansion and covers Bolton’s gross margin forecast over this period.

The analyst noted that EFK loading, fab divestitures, and a better mix could increase his gross margin estimates.

Bolton writes that ON shares are an attractive alternative to AMS peers.

Given an anticipated revenue bottom in the second quarter of 2024, lean channel inventory leading to balanced consumption by late 2024, and troughing utilization, Bolton noted that ON is well positioned for a cyclical recovery.

Bolton projected second-quarter revenue and EPS of $1.73 billion and $0.92.

Price Action: ON shares traded lower by 1.31% at $75.22 at the last check on Thursday.