It hasn’t been a great year for stocks so far ON Semiconductor (NASDAQ: ON)advanced materials company Hexcel (NYSE: HXL)and design and testing solutions company Keysight Technologies (NYSE: KEYS). All three stocks are down 11% to 15% year-over-year as of this writing, but that doesn’t mean you shouldn’t buy them. On the contrary, they all seem like great values ​​right now. Here’s why.
ON Semiconductor, short-term headwinds and long-term growth
The semiconductor company still expects markets to be challenging in 2024. At the same time, management also expects solid growth in the long term and is investing in its business accordingly.
Near-term headwinds come from its heavy exposure to the automotive and industrial end markets (combined at just over 79% of total revenue), which are weak through 2024. Unfortunately, there’s little the company can do about rising interest rates that will limit auto sales and ultimately electric vehicle (EV) investment. That’s a problem for ON Semiconductor, as it has significantly more interest in EVs than in internal combustion engines (ICEs), particularly its silicon carbide (SiC) chips.
While management does not expect much improvement in the short term, it does expect growth in the long term. That is why it recently announced a multi-year investment of up to $2 billion in the construction of a SiC production facility in Europe. The facility will support future growth in SiC, such as that resulting from the recent deal to become the primary supplier of Volkswagen for power box solutions on its platforms.
While Wall Street still expects the semiconductor company’s annual revenue to decline 13.4% in 2024, management’s recent third-quarter revenue forecast 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 appears to be an excellent value stock with a price/earnings ratio of 18.4 times expected 2024 earnings (which could be a bottoming point in earnings).
Hexcel’s long-term growth is assured
This year is not going as Hexcel investors had hoped. In 2023, the company generated 39% of its revenue from Airbus and its subcontractors, and 15% of Boeing and its subcontractors. In 2024, Hexcel planned to increase production capacity to meet production ramp-ups at both Airbus and Boeing. Unfortunately, the well-publicized delivery delays at Boeing and the recently announced reduction in aircraft delivery expectations at Airbus (from 800 aircraft deliveries to 770) have hit Hexcel hard.
This not only lowers revenue expectations (Hexcel cut its full-year revenue forecast from $1.925 billion to $2.025 billion in 2024 to $1.9 billion-$1.98 billion), but also puts pressure on margins as Hexcel prepares its business for higher shipment volumes.
Boeing and Airbus will undoubtedly do everything they can to increase delivery volumes. It is a matter of when, not if, Hexcel will begin to see the benefits of increased aircraft production in its revenue stream.
Additionally, as advanced composites become increasingly common in newer aircraft (they are lighter and stronger than traditional materials like aluminum and provide an efficiency advantage), Hexcel’s revenue per airplane will grow in the future. Furthermore, I recently looked at Boeing’s commercial market outlook through 2043, and the need for 43,975 new airplanes over the next 20 years stands out as a big plus for Hexcel, as does the 3.65% annual growth rate for widebody aircraft (which contain significantly more composite materials).
This year’s drop in stock price is a good opportunity to invest in a company that has shown excellent long-term growth figures.
Keysight Technologies
According to SEC filings, the company’s hardware, software, and services help customers “design, manufacture, implement, and optimize their products and solutions.” So you can think of Keysight as a play on customers’ willingness to invest in research and development (R&D) to produce products and solutions.
Furthermore, Keysight’s underlying growth driver is the increasing complexity of its customers’ electronics solutions. That complexity can lengthen product development lead times and increase costs accordingly, which is where Keysight’s solutions come in.
Management believes these factors will give the company 5% to 7% annual growth in the long term, which, combined with higher margins, will result in double-digit earnings growth.
That’s all fine and well, and Keysight’s long-term growth potential remains undiminished by the challenges in 2024. Unfortunately, Keysight is facing headwinds from a decline in R&D spending in response to a slowing economy. Wall Street expects Keysight’s revenue to decline nearly 10% in 2024, which is why the stock has fallen this year.
Still, end markets will eventually change, and the underlying growth engine will shine through. Trading at just under 23 times expected 2024 earnings, Keysight is attractively priced for a company whose markets could rebound strongly as pent-up R&D spending is released in line with a recovery in its customer 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.
3 Stocks Down More Than 11% in 2024 That Are Screaming Bargains in August was originally published by The Motley Fool
