PartnerRe Beats, Still Strong

We are maintaining our Buy recommendation on the shares of PartnerRe Ltd. (PRE). The company's second quarter operating earnings of $183.8 million or $3.39 per diluted share were substantially ahead of estimates. The results benefited from a moderate level of incurred losses, strong investment income growth, and a weakening U.S. dollar, which were slightly offset by a softening in reinsurance pricing and higher costs.

After reviewing 2Q08 results, which were higher-than-expected on operating basis, we are slightly increasing our FY08 and FY09 estimates to $10.87 per share and $10.10 per share respectively, prior to the conference call. At the current price, the shares of PRE trade at 0.93x its 2Q08 book value of $70.22 per share, well below the middle of its 10-year range, and at a 1.0% discount to the peer group median.

Our six-month price target of $73.00 per share reflects a slightly expanded multiple of approximately 1.05x to our estimated September 2008 book value of $69.50 per share. It also equates to approximately 6.7x our earnings estimate for FY08. Combined with the annual dividend of $1.84 per share, this target price implies a return of about 13.1% over the period.

We expect PRE to continue delivering strong results for the coming quarters based on its excellent underwriting abilities, strong capitalization, solid ratings (S&P and A.M. Best recently affirmed the ratings) and reputation in the market, despite some softening in the non-life reinsurance pricing and higher costs, though we suspect that the current negative sentiment for the financials as a whole may somewhat weigh on the share price momentum.

ON Semiconductor Still On Buy

Next quarter's revenue guidance for ON Semiconductor Corp. (ONNN), an original equipment manufacturer (OEM) of a broad-based semiconductor analog component product portfolio, is for 3-6% growth. The backlog represents over 85% of next quarter's revenue projection.

The company has also begun to get significant revenue from its recent major purchase of LSI Logic's Gresham, Oregon wafer facility, which has the potential to be a solid revenue driver. We feel the stock is undervalued at these levels, and recommend investors buy the shares.

On last count, ON's portfolio of products exceeds 17,000. Wireless, the company's second largest market, surged recently driven by success at four of the top five major cellphone manufacturers. The company has paid down large amounts of high yield debt dropping interest expense from $34 to $10 million.

A new up cycle has begun in the semiconductor sector. The quarter was characterized by a rebound of five of the company's six end markets. ON also recorded design wins for its filter products at four of the top five cellphone manufacturers. This strength is expected to continue into the fourth. The management continues to drive down operating expenses through a series of restructurings, which should have a positive effect on margins.

Growth in the second half of the year will be driven by the computing and wireless segments, with contract wins in the gaming industry possibly contributing to Q1 and thereafter. ON potentially can grow quicker than the market. The long-term strategic goal is to raise the gross margin to the 40% level.

However, the company remains highly leveraged, even with the refinancing. Heavy refinancing costs negatively impacted the cash position. The company still has a high net debt position.