Execution Remains ON Semiconductor's Biggest Opportunity ... And Its Biggest Risk

While I thought ON Semiconductor (NASDAQ:ON) was undervalued back in February, the company's history of iffy execution relative to past margin targets and the cyclical weakness in the analog chip space were offsetting concerns. The shares are up almost 50% since then, though, which is about 10% better than the performance of the SOX over that same time, not to mention Texas Instruments (NYSE:TXN) and NXP (NASDAQ:NXPI) (though STMicroelectronics (NYSE:STM) was quite a bit closer).

Investors are certainly feeling better about the health of the chip space, and metrics like lead times would seem to support that. With ON, there's also above-average potential to grow on the back of increasing content in autos, phones, and computers. Even more significant for ON, though, is the potential to drive better margins (where the historical record is admittedly mixed) and drive real synergy from the upcoming merger with Fairchild (NYSE:FCS).

I come up with a wide range of potential values for ON Semiconductor and that seems appropriate given the confounding mix here of the potential to do better and the historical realities of the company's performance. Better days are certainly possible… but then, so too is an "Atmel (NASDAQ:ATML)-like" outcome of years and years of frustrating performance. My core DCF fair value (including Fairchild) is around $10.50 now, but there is definitely potential into the mid-to-high teens if management truly can maximize its growth and margin opportunities.

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Execution Remains ON Semiconductor's Biggest Opportunity ... And Its Biggest Risk