Traders took another pound of flesh out of ON Semiconductor (NASDAQ:ONNN) last week. The stock has done an about-face since mid May when it was selling at its 52 week high of $11.95 to close at $6.90 on Friday. Investors have really hung it out to dry, and, this may be shortsighted if you have a long-term perspective. Its vital signs are strong. However, it may take a big leap of faith to pony up the dough for this mid cap, especially for the next few quarters until it gets it in gear. Die-hard value investors might take a flier on it, if you can stomach the pain for awhile.
The company has experienced mitigating circumstances the past year that accounts for the sell-off, most notably the earthquake and tsunami that delivered a devastating blow to Japan. The company has approximately 35% of revenue derived its from Japanese customers, and, also has three fabrication plants there. ON Semiconductor managed the disruption from the natural disaster and nuclear catastrophe very well, and, the stock did not sell off immediately. What really took the steam out of it was when it was downgraded by Goldman Sachs (NYSE:GS) a week after the Q1 conference call. A market correction that began in July compounded matters even worse, and, when you have a beta of 1.87, you're going to get crushed when the market tanks.
Then, there is also the issue of growing pains. On Semi pulled out all the stops the past few years in regards to acquisitions to bolster its product portfolio. According to Stephen Simpson in a May 10th, 2011 article in Investopedia titled ON Semiconductor Getting Bigger And Better:
"...the company recently acquired the Sanyo semiconductor business, Cypress Semiconductor's (NASDAQ:CY) CMOS image sensor business and Analog Device's (NASDAQ:ADI) power PC controller business. These deals give the company new business opportunities, but also integration and efficiency leverage as well."
The issue of integration is very important to ON Semi if it wishes to hold itself to a higher standard. As the August 8th, 2011, Standard & Poor's report by C. Montevirgen points out:
"...as electronic products shrink in size, the growing need for smaller power solutions has led most to offer integrated offerings that include analog, digital and discrete products. The integrated products are more proprietary and generally provide better margins. Conversely, the discrete products tend to be more commoditized, and are exposed to periods of pricing deterioration and under an oversupply."
In essence, it is utilizing the Texas Instruments (NASDAQ:TXN) playbook, and, won't be as prone to the boom and bust cycles of the lower end semiconductor market with these new offerings. As ruling chieftain and CEO Keith Jackson states in the May 5th, Q1 conference call:
"We remain well positioned for growth withing the smartphone applications. In the first quarter, we continued to ship our new power and thermal management products for smartphone market as well as our first micro USB integrated circuits for this segment...Additionally during the quarter, we shipped our first multi-chip module developed my our ASIC and MOSFET (metal oxide semiconductor field-effect transistor) teams to leading notebook suppliers..."
The primary selling point for On Semiconductor is that it is a power management company. Going back to the most recent Standard & Poor's report: "...power management chips are utilized to keep power usage in the device at efficient rates. This is especially important for gadgets that require a long battery life, such as a mobile handset or a tablet PC. Electronic equipment manufacturers are employing more power management chips and solutions in their devices, creating an attractive growth opportunity for power management semiconductor companies.".
An example of the opportunities in new markets that lie ahead for the company can be demonstrated in the appliance or 'white goods' industry. In the August 3rd, Q2 Conference Call, CEO Jackson sets the table for what looks to be a lucrative endeavor:
"The consumer end market holds exciting growth potential for ON Semiconductor in the upcoming years as consumer white goods and appliance customers move to adopt variable speed motors with inverter power systems. These integrated power modules are designed to improve the energy efficiency of washers, dryers, refrigerators, air-conditioners and other appliances...In addition to the integrated power modules, our solutions include power supplies, user interface and communications chips linking appliances to the Smart Grid...we are well positioned the capitalize on this market opportunity."
Although ON Semiconductor has a treasure trove of assets in regards to new profit channels, the company may need to take its foot off the accelerator where acquisitions are concerned. As is, it won't be finished integrating and digesting the SANYO Semiconductor business operations until the end of 2012. SANYO Semiconductor was a big purchase for them - half a billion dollars - which is substantial for a mid-cap company. However, it does add $275 million to quarterly revenue. You may enhance your earning capacity by investing in On Semi at its current price, but much can happen between now and the end of 2012 when it finally finds its bearings.
At a price near $7/share, you might be led to believe that this equity has barrel-bottom ratings, but this is not the case. Yahoo Finance analyst opinions seem very bullish on this stock. Out of the 21 analysts who cover it, eight have a strong buy, five have a buy and eight have a hold. I would call that an endorsement, not a collective bias against it the way traders have been demonizing the company. However, it must be noted that three months ago analysts had a much more favorable slant on the equity with 17 out of 21 rating ON Semi as a buy or strong buy. It could be a buying opportunity if you are a bargain hunter.
To provide further color on this potential investment, let's get a snapshot of its metrics. Yahoo Finance consensus earnings estimates gives ON Semiconductor $1.02/share for 2011, and, $$1.19/share for 2012. This translates into P/E Ratios of 6.8 for this year, and, 5.8 going forward. Outstanding if you enjoy shopping at the discount store, especially when its estimated five-year CAGR (compound annual growth rate) is 13.5%. However, revenue is projected to be flattish, going from $3.6 billion in 2011, to $3.76 billion in 2012. This could put additional pressure on the security if the global economy doesn't pick up soon.
It's been a long time coming for this company. It went public in the late 1990s during the dot com boom when it was spun out from what was then called Motorola, and had a brief period of success in 2000. However, it went into a tailspin when the entire market came crashing down in 2001, and has yet to regain its prior elevation. I know the S&P 500 (NYSEARCA:SPY) hasn't done much the past decade, but ON Semiconductor has done even worse, trading as low as $2/share just a couple of years ago. The company has a bright future ahead of it but needs to pass the Litmus test. It's all a question of timing.
I realize I'm not endearing myself with readers by not endorsing any stocks at this moment, but I'm out of the market now except with some short positions. Although ON Semiconductor isn't a household name like its major rival Texas Instruments (TXN), it may lift off once the economy gets back on track. What is now comic relief, may give you the last laugh if you grab a piece of the action while the stock is deflated. Personally, I'm keeping my powder dry.
Disclosure: I am short the market with inverse ETFs.