Morgan Stanley Upgrades ON Semiconductor, Sees Wide Range Of Potential Positive Opportunities

"We are Equal-weight ON as sizeable EPS accretion from the FCS deal (17 percent/32 percent in 2017/18) is balanced by high financial leverage and uneven execution track record with M&A," analyst Craig Hettenbach wrote in a note.

Specifically, the brokerage cited ON's struggle with the integration of the $660 million SANYO deal. The deal "negatively impacted margins and led to downward EPS revisions."

Further M&A In The Sector?

"We see better M&A plays at the momentum, including Analog Devices, Inc. ADI, Broadcom Ltd AVGO, Microchip Technology Inc. MCHP, and NXP Semiconductors NV NXPI," Hettenbach highlighted.

Related Link: Jefferies Takes A Positive View Of ON Semiconductor's Acquisition Of Fairchild Semiconductor

The analyst would become constructive when ON completes successful integration of FCS and delivers upside to accretion targets. ON targets costs savings from FCS deal at $160 million/$200 million runrate exiting 2017/2018.

Other Catalysts

Other potential catalysts include upside in gross margin if the semi cycle strengthens and new design wins in autos, which is ON's largest end market at 31 percent of sales.

Hettenbach also raised the price target by $2 to $12 on the stock. The analyst's bull case has a price target of $17, while bear thesis target came in at $6.50.

Shares of ON Semiconductor closed Wednesday's regular trading at $11.78 and were seen up 2.29 percent at $12.05 in Thursday's pre-market session.

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