On Semi: “The Best Is Yet To Come”

The year is off to a great start for investors in ON Semiconductor (ONNN), with the stock up 26% year-to-date through Wednesday’s close. But Craig Ellis, an analyst with Citigroup, says that’s nothing: he thinks “the best is yet to come.”

In a highly bullish note in which he repeats his previous declaration of ON as his top small cap pick, Ellis says there are at least three potential catalysts for ON shares that could drive the stock even higher than his current $13 price target (which itself is sharply above the current level).

Ellis notes that the company on Tuesday paid down $24 million in debt and announced the refinancing of its existing senior credit facility to a lower interest rate (LIBOR plus 175 basis points, down from LIBOR plus 225 basis points). As part of the transaction, the company also received lender approval to buy back $300 million of outstanding common stock. The buyback would help offset the dilution from $840 million in convertible debt with a convert price of $9.89.

Meanwhile, Ellis thinks the company has room to add foundry customers to its Gresham, Oregon fab. He thinks that the company could boost profits by 4-6 cents a share in 2008 by expanding its roster of fab customers.

Another opportunity, Ellis says, would be to shut down a chip fab the company operates in Malaysia and move some production to Gresham. He sees the potential for 6-12 cents a share improvement to EPS from plant consolidation. Put it all together, he says, and the stock could be worth $15 a share or more.

ON shares yesterday were up 37 cents at $9.94.

ONNN 1-yr chart