On Semiconductor - Stock Analysis

Hello,

Today the theme continues as it has for my last two posts.  Today's stock I'm going to pour over is On Semiconductor.  I sold the majority of this position when I was up 15% and the stock was falling due to economic concerns and tightening demand.  Since then, I predicted that $6 was the lowest it was going to go - which I was wrong as it's been as low as $5.70.  But did I snatch a bunch more shares on this speculative investment?  Nope.  And that's why I'm doing this.  So I can increase my conviction of the stocks I hold, and start setting price points of interest that I hopefully will be able to force myself to follow more closely now.

Why On Semi?  Well, my thesis was based upon the fact that On Semiconductor's biggest focus is on chips used for power management.  That's a huge, long-term theme that I still believe will make itself present as economies actually recover, however won't be as strong a focus unless oil prices go higher.  Supplying one of the most popular electronics makers in Samsung sure can't hurt this company, I've thought.  But not only that, they make power saving chips for all kinds of products you see on the home and roads.  Oh and that park assist feature people ooh and ahh over?  Yeah, On is a lead producer in chips that perform this function too.  Personally, although I feel the purchase of a division of Sanyo hurt this company short term - especially when it came to the Thai floods - but in the long run, this purchase will result in opening new avenues to gain market share for the company.  Problem is that all of this is over the next how many years  Is this enough to allow me to hold onto the stock?  Well, that answer really isn't easy.

Let's start with the company's positives.  First off, there's the price action.  That $5.70 low I was talking about?  That was 2 months ago today.  Since then, the stock has only managed to skyrocket 36% to today's $7.75 price tag.  Whoa doctor!  Now you know why I kick myself for not following through and snagging some shares around $6 as I had planned.  Follow disciplines and having conviction on things you've researched can be quite lucrative.  But alas, this is nothing more than the land of shoulda, woulda, coulda, so it's time to move past that and learn my lessons.  If you want to really get giddy, we're nowhere close to the stock's 52 week high despite this move too - that gives you a feel for just how broadly this stock can swing.  With all of the economic uncertainty from China and Europe, where a lot of their sales go to and having plants non-functional due to floods, 2012 slammed the company and its stock.  Considering all of their planned plants are back online and economies appear to be picking up, this would seem to be a great sign for the company and its stock.  This helps put in some really low expectations that, if beaten nicely, could launch the stock even further.  The company is also recognizing further cost-savings that should help increase the overall margin rates.  This will likely take 2-4 quarters before those gains can be realized and can be seen as a clear positive to future earnings reports.  In addition to all of this, the company announced further stock repurchases for 4th quarter and there have been mentions of a possible dividend as one of the company's 3 major goals is to return capital to shareholders.

All that being said, there can be quite a few negatives here too.  First, I don't think you can call the Tech sector, nor the semiconductor industries to be highly in favor - and that accounts for half of a stock's move.  Anyone watching the news at all lately knows Apple has been plummeting, and although some of the arguments to that is that Samsung has become extremely competitive to Apple, and could be seen as a plus to suppliers like On Semi, it's a drag on the sector.  As much as it's a positive, the price action is also scary as all get out.  36% in 2 months - which were full of holidays and light trading to boot?  This stock is hot and at 17 times anticipated 2012 earnings, it's just too hot to even consider buying right now.  The fact that the company is buying back shares is also a concern to me as these purchases may be driving the price up (good), but it's all been on no news and if the stock purchases stop, so will price appreciation (bad).  In addition to that, first half of 2013 currently isn't looking like there's going to be a lot of sudden growth by most estimates I've seen and make for myself as well.  In fact, with the current info I have, I'm only predicting $0.50 earnings for 2013 which would be approximately 11% earnings growth based on the company matching 4Q estimates when they announce later this month.  Not bad, not great.  Figuring a healthy 17 times earnings 2013 PE leaves us at a price of $8.50 and 14 times earnings leaves us at $7.00.  Risk reward in that case isn't very favorable.  All things being said, I think there will be a lot of valuable information in the fourth quarter earnings report and depending upon what we hear, this stock could move significantly either way off of that report.

All in all, here's my stance.  Had I a larger position, I would likely look for a really good opportunity to sell some of my position going into earnings.  Considering the price move, there's way too much risk that bad news comes out and crushes us.  However, since my holdings are rather scarce, I might be more inclined to just hold out and see what is said in the report.  If things look positive and the stock gets crushed, I'll look into buying more off of no less than a 10% pullback, considering how much it's grown.  If it looks bad, I'll likely bail and shrink the number of holdings I'm dealing with - as this is something I hope to do over time here.  I'd like to get back down to owning 5 or 6 positions - unless I'm playing with the house's money.  Too cautious?  Did I miss something valuable?  Maybe I'm being too carefree with this stock.  Feel free to share your thoughts.  Thanks!