Why Does Billionaire Kenneth Griffin like ON Semiconductor?

CITADEL INVESTMENT GROUPBillionaire hedge fund manager Ken Griffin disclosed a 5.1 percent stake in ON Semiconductor (NASDAQ:ONNN) on Tuesday. Citadel Investment Group now owns 23.2 million shares of the company, up from 5.9 million at the end of March.  During the first quarter of this year, Ken Griffin’s Citadel reduced its stake in the stock by nearly 60 percent (you can view Citadel’s portfolio here). The stock posted a 23 percent loss since the end of the first quarter, so Griffin doubled down on the stock with good reason.

On the other hand, Steven Cohen’s $14 billion hedge fund SAC Capital Advisors upped its ON Semiconductor holdings in the first quarter, posting triple digit increases in their exposure (Cohen’s fund also disclosed its increased stake in Aeropostale (NYSE:ARO) earlier this month). So Griffin won that bet.

Cohen might have saved a bundle of cash had he mirrored some key insider sales by senior VPs at ON during March, April, and May (you can see all of them here). All of these insiders sold in the $8.50 to $9.00 area. Additionally, Eric Bannasch, manager of Cadian Capital, reduced his ON Semiconductor position by 18 percent in the first quarter. He also sold off 56 percent of his call options. Billionaire George Soros was also among the fund managers who cut his stake significantly (see George Soros’ portfolio).

In January 2011, the company acquired SANYO Semiconductor (SANYO). In February 2011, the company acquired the “complementary metal-oxide semiconductor image sensor” unit from Cypress Semiconductor (NASDAQ:CY). These are ON’s sixth and seventh acquisitions since the fourth quarter 2007.

In the fourth quarter, the company committed to closing a plant in Japan to increase operational efficiency and facilitate investment in advanced wafer technology.   Two plants in Thailand were slated to close over the period spanning from the fourth quarter 2011 through the first quarter 2012 due to regional flooding.

With all of this activity, how does ON Semiconductor measure up to its peers? Why buy it over them? In general, I think that the recent price drop in the company’s share price to under $7 has led to an undervaluation in respect to its peers, and an attractive entry point. Note that ON Semiconductor is trading at 7.1 times forward earnings and presently operates at about 13 percent net margin.

One of its peers, Analog Devices (NASDAQ:ADI) sells higher margin products than those sold by ONNN—ADI’s net margin is around 25.2 percent.  This partially explains ADI’s high forward P/E multiple of 14.9x.  The market may also be bullish on its new product introductions: a series of quad 16- and 12-bit 3V/5V D/A converters and the AD5316R and AD5317R quad 10-bit nanoDACs®.

Another peer, International Rectifier (NYSE:IRF) has a forward P/E of 24x. IRF’s net margin was also lower than ON’s at 4.8 percent. Large funds added 1.8 million shares to their 27.5 million shares in the prior quarter. Maxim Integrated Products (NASDAQ:MXIM) provides various high-frequency process technologies and capabilities to the same end-markets as ON.  Maxim’s recently increased earnings guidance, modest growth, and wide net margin (16.1 percent) make the stock attractive.  Maxim’s forward P/E is 13.

Linear Technology (NASDAQ:LLTC) power management, data conversion, signal conditioning, RF and interface ICs, and µModule subsystems.  The company hits ON’s end markets too.  Its margins are impressive; net margin for the trailing twelve months was 31.4 percent.  While its forward P/E multiple is 14x, there is still market concern about key end markets.

Given strong hedge fund interest in ON Semiconductor and basic valuation metrics, we believe the stock is cheap. Additionally, the full potential of the synergies brought to the table by ON’s recent acquisitions have yet to be realized.  This, combined with ON’s leverage position, suggests to us that earnings will accelerate at a faster rate than the company’s peers.

blog comments powered by Disqus
Insider Monkey Headlines
Insider Monkey Small Cap Strategy
Insider Monkey Small Cap Strategy

Insider Monkey beat the market by 52 percentage points in 24 months. Our beta is only 1.2 (don't click this link if beating the market isn't important to you).

Lists

Rito Pls Buff: The 10 Least Played Champions in LoL Season 4

10 Covers of Popular Songs that are Better than the Originals

Must See TV: The 9 Most Anticipated Shows of 2015

The 15 Biggest Box Office Bombs of All Time

10 Things The World Can’t Stand About Americans

Picture Perfect: The 6 Smartphones with the Best Cameras

The 10 Best Countries To Work In the World

A Profitable Day At The Track: 5 Tips For Betting On Horses

Tearing You Apart: 6 Bad Habits That Ruin Relationships

Learning on the Job: The 6 Biggest Mistakes Parents Make

Shopaholics Rejoice: The 12 Biggest Malls in the World

Fright Night: 10 Horror Movies Based on True Stories

Mach Mania: The 10 Fastest Jets in the World

Military Heavyweights: The 10 Countries with the Most Tanks

All In: The 7 Richest Poker Players in the World

Abracadabra: The 10 Best Magicians in the World

The 10 Richest Asian Countries in the World in 2014

Eyes in the Sky: 10 Things You Need to Know About Drones

Rising Stars: The 6 Best Silicon Valley Startups

Military Muscle: The 5 Most Advanced Armies in South America

All that Glitters: The 7 Most Luxurious Jewelry Brands in the World

5 Things You Didn’t Know About ISIS but Should

Empowering Your Money: The 5 Best Energy Stocks to Invest In

The 11 Best Android Apps You Can’t Get on iOS

The 10 Most Important International Conflicts in 2014

Mood Enhancers: The 20 Most Uplifting Songs of all Time

Lover Beware: The 8 Countries that Cheat the Most

Breath of Fresh Air: The 25 Countries with the Best Air Quality on the Planet

Singles Beware: The 8 Worst Mistakes Made on First Dates

Healthy and Happy: The 10 Countries with Lowest Healthcare Costs

The 6 Best Company Team Building Activities to Build Workplace Camaraderie

Ships Ahoy: The 10 Busiest Shipping Ports in the World

10 Productivity Tips to Save You Time and Help You Do More With Less

Grab a Bite: The Most Popular Fast Food Restaurants in America

Friday Night Thirst: The 10 Most Popular Cocktails in the World

The 6 Greatest Unsolved Mysteries We May Never Figure Out

7 Useless Products You Never Should’ve Bought

The 5 Reasons Why You’re Single and Miserable

The 7 Most Addictive Foods in the World We Can’t Stop Eating (Even Though We Should)

5 Amazing Places You Can Swim with Dolphins

The Top 7 Most Livable Countries In The World

The 10 Most Expensive Baseball Cards Ever Pulled From A Pack

The 5 Easiest Second Languages to Learn for English Speakers

Silver Spoon: The 6 Richest Families in the World

The 20 Countries with the Largest Prison Populations in the World

The Top 10 Richest Actors in the World

The 10 Best Airline Stocks to Invest In Before They Fly Too High

Burger Kings: The 10 Most Expensive Burgers in the World

The 10 Most Ethnically Diverse Countries in the World

The 10 Most Exclusive Credit Cards in the World

Subscribe

Enter your email:

Delivered by FeedBurner

X

Thanks! An email with instructions is sent to !

Your email already exists in our database. Click here to go to your subscriptions

Insider Monkey returned 47.6% in its first year! Wondering How?

Download a complete edition of our newsletter for free!