I'm a believer in growth stocks. As an analyst for our Motley Fool Rule Breakers service, I think you should be a believer too. But even I have to admit some growth stories are bogus, hence this regular series.

Next up: ON Semiconductor (Nasdaq: ONNN). Is this maker of power management chips the real thing? Let's get to the numbers.

Foolish facts

Metric

ON Semiconductor

CAPS stars (out of 5)

****

Total ratings

477

Percent bulls

97.3%

Percent bears

2.7%

Bullish pitches

61 out of 62

Highest-rated peers

Integrated Device Technology, DSP Group, Power Integrations

Data current as of Sept. 29.

Semiconductors are important to me as a tech investor, but they aren't my primary area of expertise. I'm more of a follower of software, storage, and networking technology. So in analyzing ON, I turned to our chip expert, Anders Bylund.

"Like the rest of the semiconductor industry, ON is taking more orders than it can fill these days," Anders wrote in May, in a pitch explaining why he rated the stock to outperform in his CAPS portfolio. Continued demand is key to his investing thesis:

The company has delayed shutting down an age-old manufacturing plant in order to keep up with the unusual demand, and also supplements its internal capacity by outsourcing some products to Advanced Semiconductor Engineering (NYSE: ASX). ON is raising prices on "everything that's not under contract," and still expects customers to stick with the brand.

He's been wrong so far. Shares of ON Semiconductor have bounced about like a rubber ball over the past quarter. But they've also enjoyed a recent uptrend. With the stock entering today trading for less than 8 times this year's earnings estimate, I suspect there's room for a continued rally.

The elements of growth

Metric

Last 12 Months

2009

2008

Normalized net income growth

85.0%

(51.3%)

5.1%

Revenue growth

12.5%

(13.9%)

31.2%

Gross margin

40.9%

35.7%

39.7%

Receivables growth

24.8%

38.2%

7.8%

Shares outstanding

431 million

427.3 million

411.7 million

Source: Capital IQ, a division of Standard & Poor's.

From this table, it appears ON's growth engine has been revving for a while. Let's review:

  • After a poor 2009, revenue and earnings growth have returned over the past year. In the case of earnings, growth has gone stratospheric.
  • Better still, gross margins are up not only from last year but 2008, suggestive of improving expense control.
  • If there's an issue here, it's with the balance sheet. Receivables are now growing faster than revenue, a reversal from 2008. Inventory has also grown faster than sales. The risk? Customers cancel orders, leaving ON holding gear it can't sell. Anders' comments reassure me the likelihood of a big write-off is small, but it's there nonetheless.

Competitor and peer checkup

Competitor

Normalized Net Income Growth
(3 Years)

Altera (Nasdaq: ALTR)

13.7%

Atmel (Nasdaq: ATML)

18.9%

Cypress Semiconductor (NYSE: CY)

(9.4%)

Diodes International (Nasdaq: DIOD)

(5.3%)

ON Semiconductor

0.8%

Texas Instruments (NYSE: TXN)

3.5%

Source: Capital IQ. Data current as of Sept. 29.

ON falls short of peers Altera and Atmel, which is ironic. Last year, ON briefly teamed with Microchip Technology (Nasdaq: MCHP) on a hostile takeover bid of Atmel.

Management eventually gave up the chase, and judging by its lagging three-year performance in the table above, and the marked improvement over the past year shown in the first table, that appears to have been the right decision.

Grade: unsustainable
Even so, there's a difference between a good recovery and a good growth story. By the numbers, ON looks a lot like the former, and almost nothing like the latter. And yet I'm not sure it matters. ON is cheap enough for investors to ride the rally for a while, which is what I'm planning to do. I've rated ON a short-term outperform in my CAPS portfolio.

Now it's your turn to weigh in. Do you like ON Semiconductor at these levels? Would you make it one of our "11 O'Clock Stocks"? Let the debate begin in the comments box below, and when you're done, click here to get today's 11 O'Clock portfolio pick.

You can ask Tim to evaluate a favorite growth story by sending him an email or replying to him on Twitter.

True to its name, The Motley Fool is made up of a motley assortment of writers and analysts, each with a unique perspective; sometimes we agree, sometimes we disagree, but we all believe in the power of learning from each other through our Foolish community.