Jefferies & Co. upgraded its rating on shares of ON Semiconductor Corp. (NASDAQ: ONNN) to "buy" from "hold" while maintaining its price target of $9.50.

"We view ON Semiconductor's 14 percent underperformance versus SOX since July 1 (31 percent decline versus 17 percent for the SOX) as an overshoot, and believe there is 25 percent upside to the stock from current levels," said Mark Lipacis, an analyst at Jefferies.

Lipacis believes the set up is good on three dimensions: product cycles in PCs and autos, gross margin expansion, and the company is early to the earnings confessional.

Lipacis said his analysis shows that stocks of companies that are early to cut estimates during a downward revision cycle often outperform over both the near and intermediate term after that cut.

Lipacis said ON Semiconductor is one of four companies that have materially lowered expectations this earnings cycle.

Lipacis believes that ON Semiconductor's power management chips gained share in Intel's Sandy Bridge PC-MPU platform, and he expects ON Semiconductor to benefit from visibility in the PC market (20 percent of sales) as Intel ramps Sandy Bridge from 50 percent to over 90 percent of its shipments over the next two-to-four quarters.

In autos (20 percent of sales), Lipacis likes how ON Semiconductor is positioned in safety systems, power train and infotainment, and believes there is upside to his model as the Japan-Auto supply chain resumes production and ON Semiconductor benefits from increased sales of auto-chips from its Sanyo acquisition.

Historically, there has been good correlation between semiconductor stock performance and gross margin expansion, and Lipacis models ON Semiconductor gross margins to increase by 1000 basis points over the next six quarters due to Sanyo factory consolidation and better fixed cost absorption from higher utilization rates.

"We think that there is further upside potential to our estimates from revenue synergies associated with Sanyo products being sold through the ON Semiconductor sales force, as well as from ON Semiconductor products sold through the Sanyo sales force," said Lipacis.

ON Semiconductor's management indicated the potential for these synergies to start to manifest in fourth quarter of 2011 -- however, Lipacis' 4 percent sequential revenue decline modeled for fourth quarter of 2011 assumes no revenue synergies, which could prove conservative.

The brokerage lowered its 2011 EPS estimate for ON Semiconductor to $0.98 from $1.00, and its 2012 estimate to $1.12 from $1.15.

ON Semiconductor stock closed Tuesday's regular trading up 6.84 percent at $7.34 on the NASDAQ Stock Market.