FormFactor: Any Pickup In Business Should Send Stock Higher

Dec. 7.11 | About: FormFactor, Inc. (FORM)

FormFactor’s stock has been in a downward trend since late 2007 as the economy started to fall apart and it experienced a drop in demand. However, the stock now is at very depressed levels, implying that the company will continue to lose money. Any sort of pickup in the company’s business will send FORM higher.

FormFactor produces advanced wafer probe cards, which are used by semiconductor manufacturers to electrically test integrated circuits, or ICs. The company's wafer sort, burn-in and device performance testing products move IC testing upstream from post-packaging to the wafer level, enabling semiconductor manufacturers to lower their overall production costs, improve yields, and bring next-generation devices to market.

Although revenues are slightly down y/y for the first 9 months of the year, gross margin has shown some improvement as it is a positive $25.9 million versus a negative $5.6 million a year ago. In the third quarter, the company even managed to grow revenues by 10% over the third quarter from last year. EBIT is still negative though, as the company continues to wait for a pickup in demand. One side note is that some of the improvement in the company's performance has been driven by a cut in research and development as it is down 25% in the first 9 months of the year.

Although there is much to be desired from the current industry conditions, FormFactor is in a strong financial position that should provide an investor with a margin of safety to invest in the turnaround of the company. At the end of Q3, the company had over $316 million in cash and marketable securities on their books and no debt. FormFactor also had over $60 million of other current assets and just $47 million in liabilities. Assigning liquidation values to its other current assets, the assets of the company should generate around $320 million in liquidation or $6.31 per share. That is 11% upside from the stock’s current level.

The company thinks that it is being undervalued by the market as it has been buying back shares and just extended its current share repurchase authorization by another twelve months. The company is authorized to repurchase an additional $40.5 million of shares.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.