Monday, July 06, 2009

FormFactor (NASDAQ:FORM): Upgraded to Outperform at Oppenheimer; $30 target

Oppenheimer is out with a significant call on FormFactor (NASDAQ:FORM) upgrading the stock to Outperform from Sector Perform while raising their tgt to $30 (prev. $22).

According to the analyst the upgrade is due to checks confirming that FORM is now seeing the whites of the eyes of an order recovery, courtesy of 1) massive equity/debt financing by DRAM chipmakers and 2) a snapback in DRAM R&D spending to correct for under-investment the past 4 quarters. Specifically, their checks indicate that FORM recently gained visibility on a 3x sequential uptick in wafer probe card orders from its largest customer, Elpida, for Q3 (Sept). Also, FORM is strongly positioned to regain share at Samsung and Inotera/Nanya for DDR3 wafer probe cards in Q4. Raising FY09/10 ests ever so slightly, but the key to their call is strengthening visibility, likely leading to cash flow break-even or better in Q4.

- FORM has suffered the past 1-2 years from a knockout combo of 1) an oversupply cycle for memory (DRAM/NAND) chips, 2) market share loss, and 3) massive (~50% in some cases) ASP erosion. Oppenheimer's call in upgrading FORM to Outperform is that there is meaningful visibility for a recovery in all 3.

- Firm's checks indicate FORM has 1) received a ~25-unit wafer probe card order from Elpida in June, stabilizing its outlook for Q3 for rev +10%-20% Q/Q, and 2) gained visibility from Elpida for a ~90 unit follow-on order in July. With shipments starting in Sept, they see the biggest benefit to revenue in Q4.

- With big orders from Elpida, they forecast Q4 rev to hit $50M or more. With mix shift toward high-end DDR3 product, and ~10%-15% reduction in materials cost from suppliers in Q2, visibility on cash flow break-even or better financial results in Q4 has never been more certain.

- Given that rev recognition of Elpida orders primarily falls in Q4, they are lowering their Q3 est, but raising Q4--net/net, FY09-10 ests are only marginally moving up to ($1.70)/($0.80). Based on checks, Q4 rev likely will only continue to strengthen, with pending orders for DDR3 share wins at Samsung, and Inotera/Nanya.

Notablecalls: Certainly a major call from Oppenheimer. I like the fact the upgrade is based on channel checks and not valuation (which is low anyway. For a good reason of course as FORM's performance has been lumpy at best).

Visibility is something the market will appreciate in FORM's case and will likely reward with some nice upside.

Note that Elpida is FORM's largest customer (accounting for 71% of total rev in Q1:09).

I'm guessing 5-7% upside will be in store today for the stock (unless the market crashes again).

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