Stock Analysis: On Semiconductor (ONNN)

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

Today On Semi announced first quarter earnings for the 2014 year.  The quarter was ok.  Not great, but not awful.  On the positive sides, the company reported 17 cent earnings (non-GAAP) which was 2 cents above the estimates.  It also had a pretty nice increase in gross margins, which was a result of cost cutting and reorganization efforts showing results on the balance sheet.  It was stated that 60-70% of these measures have been completed with the rest mostly to happen in the second and third quarters.  Additionally the CEO made positive comments regarding the cycles of the business they supply - stating that backlogs and demand seen from their customers indicate that excessive supplies are sold out and they are starting to restock.    The biggest negatives were that the revenues were down and the Systems division (formerly Sanyo) didn't meet expectations.  For the revenues, despite oversupply being worked through, there still seems to be a challenge in pricing pressure which could continue to pressure revenues despite growing earnings.  Backlogs are nice, but they don't help enough when there is pricing pressure.  Also, because of the style of company, backlogs don't mean a lot because they don't book profit until their customer uses/sells the product.  The Systems division has been a thorn since it's been acquired - partially due to earthquakes and floods - and is still being worked through.  I believe the management team will get a hold on this, but I'm not sure if it will be fast enough for the short term.

My Stock Ownership Plans:
The conference call was somewhat encouraging.  The stock has performed well and is in a sector/group that appears to have some strength.  It's my 3rd best performing stock so far this year and if the strength they indicate comes to fruition, this stock should push between $10 and $12 as long as economic conditions stay positive.  If the economy starts taking a hit, this has to be one of the first stocks to go.  Keep a close eye on it as it could also be a short-term trade (sell now, buy late summer) to avoid any tech summer swoon, which seems to happen a fair amount given the cyclicality of the industry.  I am upgrading this stock to a 2 (12-18 month view) and maintain my $11.50 price target.