ON
Semiconductor, More Sizzle than Steak?
I
appreciate your belief in ON Semiconductor’s power of persuasion. They are good at it. They utilize vague
language such as, likely, expect, and up to, to generate a great deal of optimism over their company’s
prospects. If you read the presentation
footnotes, they will lead you to discover a variety of disclaimers and
potential impediments that may make achieving their lofty goals impossible, the
strong dollar being one of them. Historically, ON Semiconductor has been a
master at generating sizzle but slow on delivering the steak.
The
stock started its climb via a short squeeze initiated by the publication of
Greenlight Capital’s 13-F. David Einhorn’s cost basis for his first 15 million
shares was around $8.30. As a trade, he
could scoop his $70 Million now and move on to his next conquest. As an investment, the stock will probably
bounce between $10 and $12 before its next climb IF all the promises made by
its CEO are actually fulfilled. After the Einhorn publicity, there was the
shout-out on CNBC and the herd mentality of analysts to keep pushing the stock
ever higher. Using the SAME research
reports they used to rate the company a HOLD
at $8, analysts changed their mind to BUY
and upped their targets to $14!
No fundamental changes to the company had
occurred. The company’s debt/equity
ratio used to be a cause for concern. But, suddenly, their debt/equity ratio
was deemed fine by “most measures” by everyone, including The Street. Formerly, The Street had rated ON Semi a HOLD
because of their scary debt/equity ratio. Apparently, they changed their mode of
measurement. According to Benjamin
Graham, “ long-term debt must not exceed net current assets (current assets
minus current liabilities). Companies that do not meet this criterion lack the
financial stability that this methodology likes to see. The long-term debt for ONNN
is $983.0 million, while the net current assets are $765.0
million. ONNN fails this test.” http://www.nasdaq.com/symbol/onnn/guru-analysis/graham#ixzz3UyMlAUjh
Why have all these analysts changed their
mind? Maybe they like the company’s access to revolving credit. ON and its wholly-owned subsidiary, SCI LLC,
entered into an $800.0 million, five-year senior revolving credit facility. Maybe
they like the issuance of notes via
their holding company in The People’s Republic of China. $132.6 million in
2.625% Convertible Senior Notes due in 2026 and $298.4 million in Convertible
Senior B Notes due in 2026. http://www.sec.gov/Archives/edgar/data/1097864/000119312513095535/d498383dt3.htmhttp://www.sec.gov/Archives/edgar/data/1097864/000119312515069358/d875301dex105b.htm
Possibly,
the debt was made more palatable by revising former balance sheets in 2012 and
2013 as they indicated on their recent quarterly report on pages 87 and 100,
respectively, revisions of $43.8 million and $3.8 million. But murky as it is,
quantifying the debt is key because the debt must be addressed BEFORE any stock
is repurchased or equity is returned to shareholders. If you read their report
carefully, you will note that it is UP TO
a $1Billion buyback. UP TO could mean $1 $10 $100…? ON Semi already had a buyback program in place
for $300 Million; but apparently, few knew about it because little buying back
transpired! They cancelled it so they
could, dramatically, announce the new buyback program and send the stock
soaring to new highs!
As for
all the recent announcements about “cutting-edge” technology? Yes, they have
new technology…but how new is it? Or, is ON Semi, at best, catching up?
Hopefully, it’s not behind. The focusing
technology that is used in the Samsung 5 phones was developed years ago. It has
a focusing speed of .3 seconds! The
burst technology that exists on Samsung phones makes focusing irrelevant! As for the GaN announcement, CREE holds the
patents for that technology and is generously licensing it to many. Texas
Instrument, Infineon,
NXP, and Panasonic are just a few companies jumping on the GaN bandwagon. In
terms of intellectual property, 40% of ON
Semiconductor patents are due to expire in 2019; but in order to return equity
to shareholders, they are decreasing their R&D budget! http://www.onsemi.com/site/pdf/Patent-Marking.pdf
You
cite in your article that ON Semiconductor has lots of competition in an
industry that is experiencing slower growth, 3.4% in 2015 and 3.1% in 2016. With
the impact of the strong dollar, ON Semiconductor, along with all its many competitors,
could be facing great challenges to their profit margins.
Finally,
If ON Semiconductor executives are so confident that they can deliver all the “steak”
promised in their “sizzling” presentation, why are they dumping company stock
hand-over-fist? Security and Exchange filings for 2015 reveal 646,846 shares sold by company executives at the
new highs $12.75-$13.00. Late 2014, selling by insiders was intense, as well. I am still evaluating SEC filings for 2014 and
2013…the company is so involved with shell companies and subsidiaries that
getting a clear financial picture is a herculean task at best. . http://www.sec.gov/Archives/edgar/data/1097864/000119312515069358/d875301dex105b.htm http://www.sec.gov/Archives/edgar/data/1097864/000119312515035483/d864539d8k.htm
ON
Semiconductor is a good company that is great at promoting its possibilities. The stock has rapidly risen on promises and a
zero-rate Fed policy that makes borrowing to build up a balance sheet or to buy
up stock an easy avenue for catapulting a share price. The stock has risen too far too fast. The insiders know that and have been selling
their shares… a lot of them. They may use their profits to buy back the stock
when the price is MUCH lower. Don’t let that be where you wind up selling
yours!
