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ON Semiconductor -- on a roll as it breaks out

ON Semiconductor ($ONNN) popped up on a reversal alert screen on Tuesday evening. I only publish reversal alert lists on the weekends but now and then I do find some pretty interesting picks during the week.

So let's start with the chart and we can take a look at the reversal in progress.


There is a clear breakout that has taken place over the 50-DMA and the blue trend line. The stock is now right at a resistance level at $7.25. A move above that level would take it to the resistance level embodied by the 200-DMA. These two resistance levels will be a real test of how strong this breakout actually is.

What also makes this stock interesting is the attractive valuation. Here are a few measures that make the point:
  • The PE of 13 is modest (for a semiconductor company/growth stock)
  • PEG is only 0.5 which is quite low
  • Price to Sales is also modest at 1.48
  • Enterprise Multiple of 6.39 is definitely in the value stock range
These numbers imply the stock is not over-priced. This next chart shows the quarterly revenue, income and profit margin:

Revenue has been increasing steadily and after a couple of flat quarters, income in Q3-2010 increased almost 19% over the previous quarter.

The company has $1 per share in cash which isn't bad for a $7.25 stock. Where things get a little shaky is in the area of debt. The Debt to Equity ratio is relatively high at 64 though it is good news to see that the level debt was noticeably reduced in the last quarter.

The company's primary product line is focused on providing power management ICs and discrete components to the PC, automotive, consumer, medical and aerospace industries. Essentially, their chips can integrate with any products that require a power supply. The company's focus on helping reduce power consumption should help adoption of their products. ONNN is also moving into LED lighting, a sector that has been so successful for Cree and where a little competition wouldn't hurt. This kind of diversification might be just what is needed since a dependence on the PC industry could be a near-term problem now that many analysts are claiming that PC sales have slowed. Even Intel has reduced forecasts.

In summary, we have in ON Semiconductor a stock that is breaking out but is certainly not over-priced. It is also a stock where management should try to reduce debt while trying to get EPS to increase as rapidly as sales are increasing. Finally, as we approach earnings season, we have a stock that could be susceptible to the headwinds in the PC industry.

The bottom line is that the technicals look good, the valuation looks good and all we need is the third leg of the stool: growth in earnings. A good quarter might be all this stock needs to hit new highs.

Disclosure: no positions

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