Intel Corporation (NASDAQ:INTC) and ON Semiconductor Corporation (NASDAQ:ON) 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 INTC to grow earnings at a 8.72% annual rate over the next 5 years. Comparatively, ON is expected to grow at a 27.00% annual rate. All else equal, ON’s higher growth rate would imply a greater potential for capital appreciation.
Profitability and Returns
Growth doesn’t mean much if it comes at the cost of weak profitability. To adjust for differences in capital structure we’ll use EBITDA margin and Return on Investment (ROI) as measures of profitability and return. Intel Corporation (INTC) has an EBITDA margin of 40.41%, compared to an EBITDA margin of 16.87% for ON Semiconductor Corporation (ON). This suggests that INTC underlying business is more profitable. INTC’s ROI is 11.10% while ON has a ROI of 5.90%. The interpretation is that INTC’s business generates a higher return on investment than ON’s.
Cash is king when it comes to investing. INTC’s free cash flow (“FCF”) per share for the trailing twelve months was +0.13. Comparatively, ON’s free cash flow per share was +0.62. On a percent-of-sales basis, INTC’s free cash flow was 1.03% while ON converted 6.69% 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
Analysts look at liquidity and leverage ratios to assess how easily a company can cover its liabilities. INTC has a current ratio of 2.20 compared to 2.00 for ON. This means that INTC can more easily cover its most immediate liabilities over the next twelve months. INTC’s debt-to-equity ratio is 0.47 versus a D/E of 1.50 for ON. ON is therefore the more solvent of the two companies, and has lower financial risk.
INTC trades at a forward P/E of 12.76, a P/B of 2.71, and a P/S of 3.02, compared to a forward P/E of 12.10, a P/B of 3.86, and a P/S of 1.61 for ON. INTC is the cheaper of the two stocks on book value basis but is expensive in terms of P/E and P/S 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 isn’t a good investment if the stock is priced accurately. To get a sense of “value” we must compare the current price to some measure of intrinsic value such as a price target. INTC is currently priced at a -1.3% to its one-year price target of $40.05. Comparatively, ON is -1.79% relative to its price target of $19.55. This suggests that ON 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 2.60 for INTC and 2.10 for ON, which implies that analysts are more bullish on the outlook for INTC.
Risk and Volatility
To gauge the market risk of a particular stock, investors use beta. Stocks with a beta above 1 are more volatile than the market as a whole. Conversely, a beta below 1 implies below average systematic risk. INTC has a beta of 1.06 and ON’s beta is 1.99. INTC’s shares are therefore the less volatile of the two stocks.
Insider Activity and Investor Sentiment
Comparing the number of shares sold short to the float is a method analysts often use to get a reading on investor sentiment. INTC has a short ratio of 5.28 compared to a short interest of 3.95 for ON. This implies that the market is currently less bearish on the outlook for ON.
ON Semiconductor Corporation (NASDAQ:ON) beats Intel Corporation (NASDAQ:INTC) on a total of 8 of the 14 factors compared between the two stocks. ON is more profitable, has higher cash flow per share and has a higher cash conversion rate. In terms of valuation, ON is the cheaper of the two stocks on an earnings and sales basis, ON is more undervalued relative to its price target. Finally, ON has better sentiment signals based on short interest.