Monday, August 28, 2006

Calls of Note Part 1

- The Merrill Lynch Focus 1 Committee has added Freescale (NYSE:FSL) to its list. That's
consistent with firm's Buy rating, which is based on the following factors: 1) share gains in multiple end markets, 2) expectations for margin improvement, 3) strong cash flow generation and 4) attractive valuation.

Firm notes Freescale was not that profitable or well positioned when it spun out. There were concerns surrounding the company's ability to maintain its position as Motorola's key handset IC supplier. Other concerns centered around Freescale's ability to generate margin improvement, especially in the broadly diversified transportation division. The result was valuation that has yet to catch up with comparable firms.

As it's turned out, Freescale's management has done a much better job of tightening down the company's focus and improving profitability than anyone expected. Margins have exceeded the company's initial targets set at the time of the spinout, and the company has shown itself capable of not only holding onto market share in its key segments, but gaining in some cases.

Firm's $35.50 target price would put FSL on 18x their 2007 estimate, which they believe is reasonable given the potential for margin expansion. The price objective is also supported by the fair value suggested by firm's returns model.

Notablecalls: I would not be surprised to see some buy interest in FSL today. Merrill has a large following and they do move stocks. Also, the note, while containing no new information, makes a good point.

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