Is ON Semiconductor Likely to Outperform?

With shares of ON Semiconductor Corp. (NASDAQ:ONNN) trading at around $8.55, is ONNN an OUTPERFORM, WAIT AND SEE or STAY AWAY? Let’s analyze the stock with the relevant sections of our CHEAT SHEET investing framework:

C = Catalyst for the Stock’s Movement

The stock has been climbing since the earnings report and guidance were delivered last week, but is this move justifiable? Let’s take a look at the basics first. Q4 saw a GAAP net loss of $0.31 on revenue of $680.2 million. GAAP gross margin was 30.9 percent. And 4.7 million shares of common stock were repurchased.

For FY2012, there was a GAAP net loss of $0.20 on revenue of $2.9 billion. The latter was a 16 percent decrease year-over-year. Also in FY2012, 8.8 million shares of common stock were repurchased, GAAP gross margin was 32.9 percent, and cost structure was reduced.

Overall, there has been an improvement in bookings trend, and the company has achieved significant design wins in automotive and handset applications. Looking ahead to 2013, ON Semiconductor plans to return SANYO Semiconductor products group to profitability.  

Let’s take a look at some important numbers prior to forming an opinion on this stock.

E = Equity to Debt Ratio Is Normal   

The debt-to-equity ratio and balance sheet for ON Semiconductor qualify as normal.    

Debt-To-Equity

Cash

Long-Term Debt

ONNN

0.73

$631.70 Million

$1.01 Billion

STM

0.20

$2.49 Billion

$1.30 Billion

TSEM

1.38

$160.97 Million

$342.10 Million

 

T = Technicals on the Stock Chart Are Mixed

If you look at the stock over a one-year time frame, the results have been poor. However, momentum has picked up considerably over the past three months. Year-to-date, ON Semiconductor has outperformed STMicroelectronics (NYSE:STM) and Tower Semiconductor Ltd. (NASDAQ:TSEM). Only STMicroelectronics offers yield, which is 4 percent.

1 Month

Year-To-Date

1 Year

3 Year

ONNN

10.96%

21.35%

-8.89%

8.02%

STM

7.12%

17.47%

35.37%

13.59%

TSEM

-2.12%

4.78%

-31.47%

-56.63%

 

At $8.55, ON Semiconductor is currently trading above all its averages.     

50-Day SMA

7.34

100-Day SMA

6.78

200-Day SMA

6.83

 

E = Earnings Have Been Inconsistent              

As you can see from the chart below, earnings and revenue have been inconsistent on an annual basis.

2008

2009

2010

2011

2012

Revenue ($)in billions

2.06

1.77

2.31

3.44

2.90

Diluted EPS ($)

-1.13

0.14

0.65

0.03

-0.20

 

When we look at the last quarter on a year-over-year basis, we see a decline in earnings and revenue.  

12/2011

3/2012

6/2012

9/2012

12/2012

Revenue ($)in millions

767.90

744.40

744.80

725.50

680.20

Diluted EPS ($)

-0.01

0.06

0.02

0.03

-0.31

 

Let’s take a look at the next page for the Trends and Conclusion. Is this stock an OUTPERFORM, a WAIT AND SEE, or a STAY AWAY?

T = Trends Might Support the Industry

In 2012, ON Semiconductor suffered from weak demand. As many companies before it, ON Semiconductor also blamed its poor performance on natural disasters. It is hoped and thought by ON Semiconductor that the down cycle in the semiconductor industry might be coming to an end, and that’s a possibility, as ON Semiconductor is seeing lean inventory at customers and distributors.  

Conclusion

If you look at the current situation for this company, the actual results are poor. These results definitely wouldn’t inspire seasoned and highly-skilled conservative investors. However, those who are looking for big returns might see this as a good opportunity. The stock has nice upward momentum, and as long as there is hope for better times ahead, that momentum should continue. The biggest threat will likely be the stability of the broader markets, not the stability of the semiconductor industry.

This doesn’t appear to be a high-quality long-term play. Margins are poor, ROE is -5.98 percent, and the stock has gone nowhere for a decade. That said, the forward P/E is currently 11.26, the industry might be bottoming, and as stated earlier, the stock has good upside momentum.

For right now, ON Semiconductor is an OUTPERFORM, but a trailing stop would be wise.

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