As The Chip Industry Turns, ON Semiconductor Still Has Some Relative Value

I've had a love-hate relationship with ON Semiconductor (ON) for some time, loving the idea of what the company could become, but hating the long history of always coming up a little short. Management has a poor track record of hitting margin targets, and to that point I'd note that even though the company has shifted its mix toward more desirable markets, it hasn't helped gross margins.

I saw value in these shares back in May, and they've since appreciated almost 50% - well above the return of the semiconductor group and peers/rivals like Analog Devices (ADI), Microchip (MCHP), NXP Semiconductors (NXPI), STMicro (STM), and Texas Instruments (TXN). To some extent, I attribute that to the fact that in cyclical industries, it's often the operational laggards that benefit more from upturns, and the market is certainly thinking that the turn is in place.

Valuation is definitely a more mixed call. The shares don't look that interesting on free cash flow unless the company can reach and hold mid-teens FCF margins, but the shares do still look undervalued on the basis of near-term margins, and it's one of the few in the group I can say that about.

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As The Chip Industry Turns, ON Semiconductor Still Has Some Relative Value