It hasn't been a banner year so far for shares in ON Semiconductor(NASDAQ: ON), advanced materials company Hexcel(NYSE: HXL), and design and test solutions company Keysight Technologies(NYSE: KEYS). All three stocks are down 11% to 15% on the year at the time of writing, but that doesn't mean you shouldn't buy them. On the contrary, they all look like a great value right now. Here's why.
ON Semiconductor, near-term headwinds, and long-term growth
The semiconductor company continues to expect challenging markets in 2024. At the same time, its management also expects long-term solid growth and is investing in its business accordingly.
The near-term headwinds come from its heavy exposure to the automotive and industrial end markets (together slightly more than 79% of total revenue) that are weak in 2024. Unfortunately, there's little the company can do about rising interest rates curtailing automotive sales and, ultimately, electric vehicle (EV) investment. That's an issue for ON Semiconductor as it has significantly more content on EVs than internal combustion engines (ICE), notably from its silicon carbide (SiC) chips.
While management doesn't expect much improvement anytime soon, it does expect long-term growth. That's why it recently announced a multiyear investment of up to $2 billion in building a SiC manufacturing facility in Europe. The plant will help support the future growth in SiC, such as that coming from the recent deal to be the primary supplier to Volkswagen for power box solutions on its platforms.
While Wall Street still expects the semiconductor company's full-year sales to decline by 13.4% in 2024, management's recent third-quarter revenue guidance of $1.7 billion to $1.8 billion implies a sequential improvement from the $1.74 billion reported in the second quarter. Wall Street believes revenue will grow 8.4% in 2025.
ON Semiconductor looks like an outstanding value stock on 18.4 times expected 2024 earnings (which could prove to be a low point in earnings).
Hexcel's long-term growth is assured
This year isn't shaping up as Hexcel investors had hoped it would. In 2023, the company generated 39% of its sales from Airbus and its subcontractors, and 15% from Boeing and its subcontractors. In 2024, Hexcel planned to increase production capacity to meet the ramp-up in production at both Airbus and Boeing. Unfortunately, the well-publicized delivery delays at Boeing and the recently announced cut in airplane delivery expectations at Airbus (from 800 airplane deliveries to 770) have hit Hexcel hard.
It not only lowers revenue expectations -- Hexcel cut its full-year revenue guidance to $1.9 billion-$1.98 billion, from $1.925 billion to $2.025 billion in 2024 -- but it also pressures margins as Hexcel was preparing its business for greater delivery volumes.
Boeing and Airbus will undoubtedly do everything possible to raise delivery volumes. It's a question of when, not if, Hexcel starts to see the benefit of increased airplane production in its revenue line.
In addition, as its advanced composites are increasingly being used on newer planes (they are lighter and stronger than traditional materials like aluminum and bring an efficiency advantage), Hexcel's revenue per plane will increase in the future. Furthermore, I recently took a look at Boeing's commercial market outlook to 2043, and the need for 43,975 new airplanes over the next 20 years stands out as a major plus for Hexcel, as does the 3.65% annual growth rate for widebody airplanes (which contain significantly more composite materials).
This year's dip in the share price is a good opportunity to buy into a company set for excellent long-term growth.
Image source: Getty Images.
Keysight Technologies
According to its SEC filings, the company's hardware, software, and services help customers "design, manufacture, deploy, and optimize their products and solutions." As such, you can think of Keysight as a play on its customers' willingness to invest in research & development (R&D) to produce products and solutions.
In addition, Keysight's underlying growth driver is the increasing complexity of its customers' electronics solutions. That complexity can extend product development lead times and increase costs accordingly, which is where Keysight's solutions come in.
Management believes these drivers will give the company a 5% to 7% annual growth rate over the long term, which, combined with margin expansion, will result in double-digit earnings growth.
All of this is fine, and Keysight's long-term growth potential remains undiminished by its challenges in 2024. Unfortunately, Keysight faces headwinds from a pullback in R&D spending in response to a slowing economy. Wall Street expects Keysight's sales to decline by almost 10% in 2024, and that's why the stock is down this year.
Still, its end markets will eventually turn, and its underlying growth driver will shine through. Trading on slightly less than 23 times expected 2024 earnings, Keysight is attractively priced for a company whose markets could bounce back strongly when pent-up R&D spending is released in line with a recovery in its customers' end markets.
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Lee Samaha has no position in any of the stocks mentioned. The Motley Fool recommends Hexcel and ON Semiconductor. The Motley Fool has a disclosure policy.
