Swimming Upstream With ON Semiconductor

Traders took another pound of flesh out of ON Semiconductor (ONNN) last week. The stock has done an about-face since mid May when it was selling at its 52 week high of $11.95 to close at $6.90 on Friday. Investors have really hung it out to dry, and, this may be shortsighted if you have a long term perspective. Its vital signs are strong. However, it may take a big leap of faith to pony up the dough for this mid-cap, especially for the next few quarters until it gets it in gear. Die-hard value investors might take a flier on it, if you can stomach the pain for awhile.

The company has experienced mitigating circumstances the past year that accounts for the sell-off, most notably the earthquake and tsunami that delivered a devastating blow to Japan. The company has approximately 35% of revenues derived its from Japanese customers, and, also has three fabrication plants there. ON Semiconductor managed the disruption from the natural disaster and nuclear catastrophe very well, and, the stock did not sell off immediately. What really took the steam out of it was when it was downgraded by Goldman Sachs (GS) a week after the Q1 conference call. A market correction that began in July compounded matters even worse, and, when you have a beta of 1.87, you're going to get crushed when the market tanks.

Then, there is also the issue of growing pains. On Semi pulled out all the stops the past few years in regards to acquisitions to bolster its product portfolio. According to Stephen Simpson in a May 10th, 2011 article in Investopedia titled ON Semiconductor Getting Bigger And Better: "...the company recently acquired the Sanyo semiconductor business, Cypress Semiconductor's (CY) CMOS image sensor business and Analog Device's (ADI) power PC controller business. These deals give the company new business opportunities, but also integration and efficiency leverage as well.".

The issue of integration is very important to ON Semi if they wish to hold themselves to a higher standard. As the August 8th, 2011 Standard & Poor's report by C. Montevirgen points out: "...as electronic products shrink in size, the growing need for smaller power solutions has led most to offer integrated offerings that include analog, digital and discrete products. The integrated products are more proprietary and generally provide better margins. Conversely, the discrete products tend to be more commoditized, and are exposed to periods of pricing deterioration and under an oversupply.".

In essence, they are utilizing the Texas Instruments (TXN) playbook, and, won't be as prone to the boom and bust cycles of the lower end semiconductor market with these new offerings. As ruling chieftain and CEO Keith Jackson states in the May 5th, Q1 conference call: "We remain well positioned for growth withing the smartphone applications. In the first quarter, we continued to ship our new power and thermal management products for smartphone market as well as our first micro USB integrated circuits for this segment...Additionally during the quarter, we shipped our first multi-chip module developed my our ASIC and MOSFET (metal oxide semiconductor field-effect transistor) teams to leading notebook suppliers...".

The primary selling point for On Semiconductor is that they are a power management company. Going back to the most recent Standard & Poor's report: "...power management chips are utilized to keep power usage in the device at efficient rates. This is especially important for gadgets that require a long battery life, such as a mobile handset or a tablet PC. Electronic equipment manufacturers are employing more power management chips and solutions in their devices, creating an attractive growth opportunity for power management semiconductor companies.".

An example of the opportunities in new markets that lie ahead for the company can be demonstrated in the appliance or 'white goods' industry. In the August 3rd, Q2 Conference Call, CEO Jackson sets the table for what looks to be a lucrative endeavor: "The consumer end market holds exciting growth potential for ON Semiconductor in the upcoming years as consumer white goods and appliance customers move to adopt variable speed motors with inverter power systems. These integrated power modules are designed to improve the energy efficiency of washers, dryers, refrigerators, air-conditioners and other appliances...In addition to the integrated power modules, our solutions include power supplies, user interface and communications chips linking appliances to the Smart Grid...we are well positioned the capitalize on this market opportunity.".

Although ON Semiconductor has a treasure trove of assets in regards to new profit channels, they may need to take their foot off the accelerator where acquisitions are concerned. As is, they won't be finished integrating and digesting the SANYO Semiconductor business operations until the end of 2012. SANYO Semiconductor was a big purchase for them - half a billion dollars - which is substantial for a mid-cap company. However, it does add $275 million to quarterly revenues. You may enhance your earning capacity by investing in On Semi at its current price, but much can happen between now and the end of 2012 when it finally finds its bearings.

At a price near $7/share, you might be led to believe that this equity has barrel-bottom ratings, but this is not the case. Yahoo Finance analyst opinions seem very bullish on this stock. Out of the 21 analysts that cover it, eight have a strong buy, five have a buy and eight have a hold. I would call that an endorsement, not a collective bias against it the way traders have been demonizing the company. However, it must be noted that three months ago analysts had a much more favorable slant on the equity with 17 out of 21 rating ON Semi as a buy or strong buy. Could be a buying opportunity if you are a bargain hunter.

To provide further color on this potential investment, let's get a snapshot of its metrics. Yahoo Finance consensus earnings estimates gives ON Semiconductor $1.02/share for 2011, and, $$1.19/share for 2012. This translates into P/E Ratios of 6.8 for this year, and, 5.8 going forward. Outstanding if you enjoy shopping at the discount store, especially when its estimated five year CAGR (compound annual growth rate) is 13.5%. However, revenues are projected to be flattish going from $3.6 billion in 2011 to $3.76 billion in 2012. This could put additional pressure on the security if the global economy doesn't pick up soon.

It's been a long time coming for this company. It went public in the late 1990's during the dot com boom when it was spun out from what was then called Motorola, and, had a brief period of success in 2000. However, it went into a tailspin when the entire market came crashing down in 2001, and, has yet to regain its prior elevation. I know the S&P 500 hasn't done much the past decade, but ON Semiconductor has done even worse, trading as low as $2/share just a couple of years ago. The company has a bright future ahead of it but needs to pass the Litmus test. It's all a question of timing.

I realize I'm not endearing myself with readers by not endorsing any stocks at this moment, but I'm out of the market now except with some short positions. Although ON Semiconductor isn't a household name like its major rival Texas Instruments, it may liftoff once the economy gets back on track. What is now comic relief, may give you the last laugh if you grab a piece of the action while the stock is deflated. Personally, I'm keeping my powder dry.

FEI Company Casts a Wider Net

FEI Company (FEIC) reported show stopping numbers the past nine months. Three picture perfect quarters. Sitting high on top of the organizational chart is CEO Don Kania, and he sets the record straight in the August 2nd, 2011, Q2 Conference Call: "We delivered record revenue and earnings for the third quarter in a row...(the most recent one being) the second highest in our history and the highest ever for second quarter with 17% year-over-year growth...".

Investors have taken notice and elevated FEI to its 52 week high of $41 on July 7th, but have since gotten cold feet and stopped it in its tracks, pushing it back to the $33 range where it currently trades. This decrease in price coincided with the general market sell-off which began in the second week of July. It's a solid company with a compelling story, and, if you bought the equity at the 52 week low of $16.50, you're in great shape. You have a double. Market participants with a long term perspective may be rewarded handsomely with a stake in FEI Company. With investors giving the stock the treatment, you may even consider buying the company now, but, before you do, let's look at the overall picture and see what you think.

FEI Company primarily manufactures microscopes for use in nanotechnology. As the most recent 10-K states: "We are a leading supplier of instruments for nanoscale imaging, analysis and prototyping to enable research, development and manufacturing in a range of industrial, academic and research institutional applications.". CEO Kania expounds upon the future in the Q1 Conference Call: "Looking forward, prospects remain good as the technical demands of shrinking devices continues to increase...". Think Moore's Law where the number of transistors that can be placed inexpensively on an integrated circuit doubles approximately every two years.

The organization has four product segments which are: Electronics (35%), Life Sciences (12%), Research and Industry (29%), and, Services and Components (24%). It has sales and operations in 50 countries around the world of which 68% of revenues come from abroad. The R&D budget is healthy, and plans for expansion address the potential increase in market share. CEO Kania explains this in the Q2 Conference Call: "As the year progresses, we expect R&D spending to expand to our target of 11%. We believe this level of spending is matched to our strategy to double our served available market by 2014.".

Doubling your market in three years is a hefty goal, but in the past five years, FEI Company has done an impressive job of broadening their customer base to industries beyond their previous core competency. Portland Business Journal writer Erik Siemers reflects upon this in his May, 20th, 2011 article Hillsboros'a FEI Busts Boundries: "FEI - whose microscopes average $1 million in price but can go as high as $6 million - was once heavily reliant upon the the semiconductor manufacturing market. As recently as 2004, the company's sales were split evenly between semiconductor manufacturers and research institutions, with a sliver going to customers in the data storage industry. Over the past five years in particular, the company has successfully penetrated new markets including life sciences and heavy industries such as mining, automotive and aerospace manufacturing.".

The article goes on to say that: "Its next target is the oil and gas market...FEI's technology can examine pieces of rock from a mine or oil well to discover its exact mineral content. That can help operators decide weather they've drilled far enough...In an industry that spends several billion dollars each year exploring for natural resources, the opportunity for FEI is plentiful. In a way, it could be the microscopy industry's equivalent to a gold rush.".

FEI isn't part of the old-boy network, but they have been around since 1971, and, went public in 1995. This is a company with good DNA. I examined their numbers going back to 2001, and, sure enough, it's been a history of boom and bust cycles. Earnings appear to be on a linear rise the past few years, albeit lumpy on both an annual and quarterly basis. However, this is an old pattern for them and, as a result, the security keeps getting tripped up once the market gets wind of inconsistent earnings results.

Their Achilles' heel was once being a prisoner to the ebbs and flows of the semiconductor cycle, but they are still subject to the seasonality of the technology sector. As the 10-K points out: "Our history shows that our revenues and bookings normally peak in the fourth quarter. Bookings are normally lowest in the second quarter and revenues are normally lowest in the third quarter...". They are currently in the third quarter and this may mean more pressure on the share price.

Although they've established a beachhead in additional industries like oil and gas exploration, you may be still be paying a price premium for FEI Company. At least in the near-term. As CEO Kania explains in the Q2 Conference Call: "...we are prudently planning for Electronics orders to be down in the third quarter. Based on discussions with customers, we expect the rebound in the fourth quarter as substantial technology challenges continue to face the industry.".

The company's P/E Ratio for 2011 is 14.35 which is historically low for FEI. Since 2006, the average annual P/E Ratio has been close to 30, except for last year when it was 17. Yahoo Finance consensus analyst estimates doesn't have much information available in regards to current or projected earnings. I used ValueLine metrics for most of my calculations. Yahoo Finance does state that on a five year compound annual growth rate, FEI Company is slated to grow at 11.67%, and, revenue is going to grow from $824 million in 2011 to $870 million in 2012. That's under 10%.

Going back to ValueLine, they believe that for 2012, top-line growth will be only 5% and earnings will come in at a pace of 9%. That's fairly close to the Yahoo Finance estimates. ValueLine is also concerned with the health of the global economy and FEI's symbiotic relationship with the semiconductor industry. This may put a damper on share appreciation for the next twelve months. I concur with their assessment, but not without some reservations.

In my personal portfolio, I believe the financial markets are on life-support, so I've remained short, or, in cash positions for the last year and a half. However, if I am wrong, and, other naysayers are wrong, then organizations like FEI Company could make you a boatload of money. The profits may be mind boggling. The market has been fascinating theater of late with a global recession looming and governments worldwide putting their fingers in the dikes. However, if we do get a continued rebound in the indexes, then in the short-term, a company like FEI would be the way to go. If history is any indication, they should have a terrific 4th quarter.

Teradata: A Step Above in Business Intelligence

"Big Data" is an expression that's crept into the lexicon of IT professionals across the corporate landscape. Teradata (TDC) is the top of the line in big data warehousing and data extraction with their software, hardware, consulting and support services. However, they are not alone in the field. Primary competitors IBM, Oracle (ORCL), SAP, and, to a lesser extent Informatica (INFA), are no slouches and are putting up a fight. Teradata is trying to outflank the market with their recent acquisitions of Aprimo and Aster Data. This allows them to integrate their offerings in the cloud and gives them an upper hand, but in no way gives them a license to run the table.

If you aren't familiar with the concept of big data, it is a play on the burgeoning growth of the new services Internet 2.0 has presented us. According to the most recent Teradata 10-K: "...examples include web logs, radio-frequency identification, sensor and social network data, Internet text and search indexing, call detail records, genomics, astronomy, biological research and military surveillance information, medical records, photography archives, video archives, and large scale eCommerce data.". The whole shebang. Just about anything we do with Internet applications.

We have ignition in the volcanic rise in all of this information, and, Teradata CEO Michael Koehler brings it all to a head in the Q1 conference call: "Looking to the future, the explosion of data will continue. IDC says this explosive growth means that by 2020, our digital universe will be 44x as big as it was in 2009. Whether data grows by 44x or 22x by 2020, it's a lot of data corporations will need to manage and extract value from.".

Going a step further, in Teradata's Q2 conference call, CEO Koehler explains: "All of this big and complex data presents an opportunity and a threat to corporations. The one's who are able to manage the data and extract new insights and precision from it will have an advantage over their competitors. The corporations that don't manage this data explosion and extract value from it, will be stuck with the cost of the data and will be at a competitive disadvantage.".

A probable scenario in active data warehousing was given in the August 4th, 2011 S&P Report on Teradata by analyst Thomas Smith: "...a business's call center could produce raw data on call attributes (e.g., number of calls, duration, agent, customer, dropped calls, results), which could be a starting point for mapping and analyzing overall interactions with customers, including Internet communications, which could then become the basis for a plan to improve customer satisfaction.".

Another example is given by Teradata CIO Stephen Brobst on May 4th, 2011 in an article by Arima Salah-Ahmed in Daily News Egypt: "If I introduce a new product or service, I can get immediate feedback that would've taken months through focus groups and research. I can readjust my pricing and market position immediately with that data.".

Teradata is attempting to get control of the information asylum by going for the jugular. As mentioned earlier, with the acquisitions of Aster Data and Aprimo, the company now throws its weight around in the explosive arena of cloud computing. Aster Data was purchased for unstructured big data and Aprimo was absorbed for integrated marketing management and applications.

Mr. Koehler talks about the Aprimo move in the Q1 conference call: "Moving on to Aprimo. The acquisition has made Teradata a leader now in integrated marketing management...But in addition, Aprimo serves as a foundation to build out more applications and to leverage their Software as a Service and Cloud capabilities more broadly, longer term.....we have already merged our existing Teradata applications into Aprimo.".

It should be noted that according to Chris Kanaracus from the IDG News Service in a posting titled Teradata Buys Aster Data, Boosts 'Big Data' Wares: "Aster Data's platform is also available for cloud-based deployments on Amazon Web Services, AppNexus, Dell's Data Cloud, and Terremark...".

Although there is the potential for good, solid growth for Teradata from new customers in the largest 3,000 global companies, there is also the aspect of additional business from its existing client base. As the most recent 10-K points out: "Data warehouses are typically built one project at a time. For example, an initial data warehouse may start with a single subject area, which forms the foundation of data that is available to be leveraged for the next project, and so on. Therefore, a customer with a large order in one quarter is likely to generate additional revenue for subsequent periods.".

Head honcho Koehler discusses the future going forward for the company in terms of sales and earnings growth in the Q2 conference call: "...as we look out longer-term, we're looking at a minimum of 10% of revenue growth over the longer term. And over the longer term, we're looking at earnings per share growth of 1.5x at revenue growth. I think shorter term, we have an opportunity like we're seeing right now for higher revenue growth, but maybe not as robust of an EPS growth relative to the revenue growth that we're making.". That near term revenue growth he is referring to is also discussed in the same transcript: "Turning to guidance, we are increasing our revenue growth guidance for 2011, from a range of 14% - 16% to a range of 18% - 20%. And we're increasing EPS from a range of $2.13 to $2.23 to a range of $2.20 to $2.28.".

Nothing gets an investor's blood boiling like a miss on heightened expectations, and, Teradata has been handcuffed since the CEO reported its numbers on August 4th, falling from a price of $54 to its current valuation of roughly $45. The sinkhole the stock has fallen into can be attributed to the overall market sell-off, but it was also trading at a fairly lofty valuation.

Consensus earnings estimates on Yahoo Finance give Teradata an EPS of $2.26 for the current year which gave it a P/E Ratio of 25 at $56/share. Not too expensive, but for a company which is slated to grow at a five year CAGR (compound annual growth rate) of 13.88%, you can find a better entry point. Many investors can't contain their enthusiasm about the prospects of the markets going forward, like they are going to make beaucoup bucks by putting their money on any security in the technology space. I don't believe that to be true. This is no ordinary recession we are experiencing. As of this writing, Teradata's P/E Ratio is 20. A very tempting valuation, but still too expensive for me as earnings contract on a global scale.

I don't mean to be heavy handed with a company like Teradata. It's a quality organization that was formed in 1979 and spun out of NCR in 2007. R&D is 7.6% of 2010 revenues which is a plus. It operates on a global basis with a footprint in 60 countries. It also has a broad customer base with the top ten customers accounting for only 16% of revenues. If you get the opportunity to read any of their conference call transcripts, you'll be impressed by the heavy hitters they do business with. For an example, eight of the top ten retailers utilize Teradata, companies like Walmart (WMT) and Best Buy (BBY). I'd like a quality equity like Teradata for my portfolio, but until the global debt situation is resolved, I'll just watch and wait.