Stock Analysis: On Semiconductor (ON)

Notes:
Stock Ratings: 1 = buy at current stock prices, 2 = buy on a 5-10% dip in stock price, 3 = sell on a 5-10% increase in stock price, 4 = sell at current stock prices to raise cash.  Ratings are based upon 12-18 month outlook on stock direction and not necessarily related to moves I make due to financial positioning.

Yesterday, On Semiconductor announced their second quarter earning results.  They were mixed, as they met earnings expectations of $0.22, but missed on revenues by delivering results of $880.5M, which was over $10M below estimates.  Most of the estimate miss was related to macroeconomic concerns with Europe and Japan as well as a supply chain issue with one of their customers.  They also saw a slowdown in orders in the last half of June as well, which is a little concerning, given all of the China fears and impacts from their crashing stock market.  There's no doubt that this was a quarter that had budding concerns which only supported reasons for the stock to have dropped as much as it had.  However, I don't believe what I heard was so bad to warrant further selling.  

There were a fair mix of positive and negative news in this quarterly  report.  While revenues did miss, the company still managed to hit earnings by increasing margins and doing a solid job managing the company's execution, including appropriate hedging against a strong dollar.  Order demand did manage to stay fairly strong, even despite the drop off towards the end of the quarter in what is typically a slow period, cyclically.  They commented that they've seen that order demand start to pick up a little again as well.  The automotive sector, which was about 34% of the company's revenues this quarter, is expected to only get stronger sequentially despite the 3% decrease it saw this quarter.  Finally, the company still has 3/4 of it's funds allocated for share repurchases over the next 4 years.  

Not everything is rosy, though.  The company's automotive revenues come mostly from Europe, Japan, and China.  All three of these areas have been getting hit on macroeconomic concerns.  Europe, outside of Greece, is showing signs of life, which could be a light at the end of the tunnel while demand and design wins work to pick up slack.  This could be taken positively or negatively, however, I'm not a big fan to hear they've scaled back factory production.  While this does prevent oversupply in inventories, it also refutes the concept of growing demand and orders.  I think this will allow them to keep costs and pricing pressures under control, but it also worries me that third quarter results will also be to the low end of their $890M - $930M revenue guidance.  Finally, as a shareholder, I'm not happy to hear the company blew over $130M on share repurchases that averaged $12.59 when the stock is sitting around $10 now.  It makes me doubt the benefit of the repurchase program, when the company clearly isn't buying at solid prices or back in buying after getting things obviously wrong.

In short, I give this company is rated a 2.5.  It's not really a buy, but it's not really a sell either.  We might be kind of dead in the water for now - at least until September or October as the "tech season" starts to take shape.  I do feel we should legitimately be near the bottom of the stock.  I feel I see technical signs that the stock has reached a bottom area and the selling pressure is dying off.  We may see a downgrade or two more (one was published today), but I'm not sure they can force the stock to stay below such a strong technical floor that I see in place.  I am still estimating earnings around $0.86, however, that doesn't account for adjustments due to share repurchases.  Because of this, the strong cost management, and the strong pipeline and design wins the company is showing, I still believe this can be a $13 stock.  I stated the company is a 2.5, but for the sake of using whole numbers, I rank it a 2.  If it pulls below $10 it likely is worth buying more, however, beware of China, as that can give the stock good reason to be below $10 too.

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