Thursday, October 26, 2006

Color on quarter: FormFactor (NASDAQ:FORM)

Several firms are commenting on FormFactor (NASDAQ:FORM) after the co released in-line results but guided down:

- Goldman Sachs notes their call to buy the stock into earnings was terrible. However, weaker than anticipated guidance doesn't change their view that FormFactor is the best positioned SPE company over the intermediate-term. They would therefore aggressively buy the stock on weakness, as they believe: 1) growth opportunities for FormFactor are better than for any other SPE company and most other Semi companies; 2) share weakness post the report has left the stock under-valued, as the firm believes FormFactor can achieve $125m in quarterly sales and $0.50 in quarterly EPS or ~$2.00 in annualized run-rate EPS when capacity ramps in 2007; and 3) the stock is heavily shorted (8% of shares are short), creating the possibility of a gap up in the stock as the market begins to refocus on the intermediate-term growth prospects.

They see ~15% upside to 12-month price target of $50, which is based on a 25X multiple applied to ~$2.00 in annualized run-rate EPS.

- Deutsche Bank says they are cutting estimates after weak guidance for the December quarter. The firm had confirmed the delay with the new NAND product prior to the earnings release and view it as a short term issue. But attributing the slower growth to a delay in
the 70nm DRAM design shrink came out of the blue. Firm recommends accumulating the
stock for the new product story in 2007.

New products should support strong growth next year assuming the base DRAM business benefits from design shrink. They think the new Harmony product (one of two new products) alone could add $50-75 million in sales next year. KGD (Known Good Die) is the other new product segment.

Firm thinks the Harmony technology is proven at 200mm and FORM is shipping cards to Hynix. The 300mm product will move into production in the second half. Channel checks point to 300mm integration issues with the tester but nothing that appears to be a show stopper.

Tgt goes to $45 from $47 with Buy rating maintained.

- JP Morgan notes Management indicated that the current high level of profitability being experienced by DRAM manf was causing them to delay their transition to the 70nm tech node. This reasoning is hard to accept and the firm believes the weakness in the DRAM outlook is more likely attributed to a slower than expected adoption of DDR2 DRAM. They suspect expectations for a fast DDR2 adoption rate caused those manf to order more new probe cards than was actually necessary in C1H06, and that those same DRAM manf are now working through those cards. This will only have a short term effect on FormFactor's outlook and, absent any incremental competitors coming on the scene, new product design dynamics for DRAM should continue to support FormFactor's longer term DRAM probe card revenue growth rate.

Book To Bill declined to .93, the lowest level since C4Q04 This increases the likelihood for the company to miss guidance and is likely to limit stock outperformance in the near term. Management stated that lead times have declined moderately as the new factory has ramped, but the fim does not believe the company's ability to turn more business during the quarter is enough to offset the declining order outlook.

Reiterates Neutra nnd would stay on the sidelines at this time due to the lower than parity book to bill ratio and increasing nearness to the seasonally weak C1Q07 for memory. These factors lead the firm to believe there is unacceptable level of risk associated with the stock given its significant valuation premium vs. coverage universe. They would either prefer to wait for a lower stock price or for near term fundamentals to improve before becoming more positive on the stock.

Notablecalls: I agree with JP here. High profitability hasn't been an issue for the DRAM sector for a long time. FORM has been a semi darling, beating ests over and over again. Now that they stumbled, some of the hot money will leave the stock causing significant pressure. Altought the general sentiment is still bullish and supportive, I would not be looking to play a bounce in this one.

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