Tickers in this Article: ONNN, ATML, ADI, CY, QCOM, TXN, STX
Even investors who don't know a MOSFET from a Muppet should give some thought to attractively priced semiconductor stocks. It's true that it is an absurdly cyclical market and there is rampant competition, but these are also consummate second-chance stocks; investors often get multiple opportunities to invest in solid growers at reasonable valuations.

With that in mind, now may be a good time to consider ON Semiconductor (Nasdaq:ONNN). Although the recent weakness in the tech sector has not really impacted this stock (it's hardly down relative to its 52-week high), there is a lot of potential here as the company looks to move up the value chain with its customers.

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First Quarter Results - Less Bad Is Good Enough
As has been the case for most chip stocks, no one was really expecting a strong quarter from ON Semiconductor, so "less bad" is good enough. Reported revenue rose 58% from last year and 50% from the December quarter as the company included the results of its Sanyo acquisition. Although pricing was not strong (down slightly on a sequential basis) and lead times are expanding, the impact of the quake in Japan was not as bad as it could have been. (or more, see 5 Hot Semiconductor Stocks.)

Minus that deal, organic growth was more on the order of a 2% sequential improvement. Still, that was about 5% better than expected and above the highest published estimate.

When it comes to figuring out the profitability of the company for the first quarter, it may be best to grab a scent hound and a Ouija board. Clearly that is an exaggeration, but there were plenty of charges, step-ups and other items that make comparisons tricky. Netting it all out, it looks like gross margin slid about five points from the December quarter, but would have possibly been up on a truly like-for-like basis. Likewise, operating margin contracted about four and a half points from the December quarter. (or more, see The Bottom Line On Margins.)

A Serial Acquirer Needs to Put the Parts Together
ON Semiconductor certainly doesn't mind doing deals. Although rebuffed years ago in an attempt to dismantle Atmel (Nasdaq:ATML), the company has recently acquired the Sanyo semiconductor business, Cypress Semiconductor's (NYSE:CY) CMOS image sensor business and Analog Device's (NYSE:ADI) power PC controller business. These deals give the company new business opportunities, but also integration and efficiency leverage as well - in the case of Sanyo in particular, there could be a lot of upside to accrue to ON Semiconductor if it can lift those margins.

Moving Up the Chain and Fending Off Rivals
Power management is important across multiple industries and applications, but it still segments out into higher-value and lower-value components. One challenge for ONNN, then, is to move up the value chain and become less of a commodity-type chip company. After all, it is increasingly difficult to compete on the lower range of the market and there are substantial rewards for achieving the margins enjoyed by companies like Qualcomm (Nasdaq:QCOM) and Texas Instruments (NYSE:TXN).

Speaking of TI, there are still worries out there about whether this company is going to threaten ONNN's business. With a huge new fab coming on line, TI could push down prices in markets like power MOSFETS and/or enter lower-price markets without damaging their own margin structure. (For more, see Texas Instruments Takes A Big Swing.)

Does ONNN Need a Better Mix?
One other lingering concern about ON Semiconductor is its mix of business. The automobile industry accounts for about 20% of the company's business, with the PC/notebook market accounting for another 25%. That will be an issue for many investors - autos are notoriously cyclical and nobody seems to like the PC industry anymore. So while the company does count quality customers like Seagate (NYSE:STX), Hewlett-Packard (NYSE:HPQ) and Dell (Nasdaq:DELL) among its roster, it seems that the lower exposure to wireless, networking and medical (all below 20%) is still problematic.

The Bottom Line
If ON Semiconductor can succeed in its efforts to go up-market and drive better margins out of its Sanyo assets, this stock really looks attractive at today's prices. What's more, the down-side seems limited as well - even if the company just grinds on as before and maintains past levels of cash flow production, the stock still looks too cheap (by more than 10%).

Of course there is always the risk that ON Semiconductor travels backwards and loses sales and margins to rivals like Texas Instruments. But that's a common risk to equity investing - any stock can fail. ON Semiconductor does not seem to be a high failure risk, though, and this may be one of the rare tech names that even a value-oriented investor can buy.

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