Stock Analysis: On Semiconductor (ONNN)
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
On Semi is an analog chip maker that has many of their primary focuses on energy saving process chips. They serve a broad range of industries outside of the typically thought of computer and mobile technologies. Like how your car can parallel park itself or it's LED cabin lights? Chances are favorable On has chips helping run these things. Does Grandpa have a hearing aid? Maybe On has chips in it to help the battery last longer. Generally speaking, On will serve industrial, medical, power and power management, consumer (think appliances), and aerospace industries in addition to your traditional tech.
Normally speaking, if I told you that this stock returned a 16.88% return for me last year, you'd say it must have done well. However, 2013 wasn't a normal year. The S&P 500 returned 29.6%, the technology sector underperformed that with a 26.02% return (defined by the XLK ETF fund), however, the semiconductor's index (SOX) was very strong with a 41.97% return. In other words, On had a really, really crappy year. It seems that the main reason for this downfall continues to point to execution from the upper management. In 2012 they purchased a segment from Sanyo and it seems the company has grossly overestimated their ability to meld this business into their own and return profits. To On's credit, they have had to deal with the disaster in Japan, which significantly slowed a major distribution path for them and they had plants impacted by the Thai floods, however, in the end, they simply bought into too much assets without demand to fulfill it all. 2013 has been the start of major re-alignments and cost cuttings (job cutting) to reduce unneeded factories and processes - trying to optimize their space usage, increase overall production at their factories and streamline things in general. Clearly, progress has been made, however, there is a lot of work in front of this company as well. They have set goals for 2014 and 2015 which I believe are attainable and beatable and appear to continue to make progress in every quarter we hear from them.
2014 appears to be a year of more of the same from 2013. The focus will be on continuing to focus on higher margin products that they can profit more from, additional cost cutting and and realignments to meet their goals for a profitable Sanyo division to support the rest of their business - instead of dragging it down as it has. I'm guessing the company will be able to pull off roughly $0.50 earnings for the year in 2014. Giving them an industry average 17x earnings multiplier, my price target is around 8.50. If they can really start to get their act together, there's actually some growth potential to this company that can increase earnings. Given the stock's current $8.10 price tag, I'd say over the next couple years it has a $2 upside and $1 downside potential - that equates to 12.5% down and 25% up. Respectable potential and growth, considering it's rather unlikely we're going to see more 30% upsides to the S&P.
My Stock Ownership Plans:
For me, this has felt a lot like a "do-nothing" stock, meaning it's doing nothing for me. Part of that is due to the natural emotion tied to it's sub-par performance to its peers last year. Truth is, though, that this is a turn-around story that has some room to go from a single digit to double digit stock. At this point, this stock consists of only 5.4% of my portfolio. I have lots of room to add more and feel likely to do so if this drops back to under $7.75 or lower - meaning I rank this a two on my 1 to 4 scale. My price target remains at $8.50 right now, but the 4th quarter earnings call in February could change that target, allowing us more room to run if I find it to be more possible.