FormFactor Continues to Struggle; Expecting Further Downside

Citigroup notes recent checks suggest FormFactor (NASDAQ:FORM) is struggling with manufacturing yield which has resulted in a significant increase in rework and scrap material. As a result, they believe near-term margins - and potentially revenue/EPS - may be at risk and they are cutting their already below consensus FQ2:07 (Jun) EPS from $0.34 to $0.31 (consensus $0.34). While checks still suggest demand remains strong, these issues are in addition to recent checks which have indicated FORM's NAND product continues to struggle and it has also begun cutting price on DRAM cards in an effort to keep MJC from gaining ground.

While near term risk to FORM's fundamentals, downside appears limited to around $35 (20x downside C2008 EPS of $1.70) and they are still believers in longer-term story given strong fundamental demand for FORM's DRAM cards and some new evaluations (e.g., TXN) on logic side that could help in C2008.

Therefore, they are loathe to downgrade to Sell (maintains Hold), but these issues likely to at best keep lid on stock near-term and at worst cause break to mid $30's.

It maintains its $45 12mo target, and looks for a break to $35-37 near term. Many investors are looking to Buy FORM at these levels. Citi notes they would wait out what could be bad news near term. F07 GAAP EPS from $1.44 to $1.39, F08 unchanged.

Notablecalls: I failed to call Citi's negative note on FORM outright actionable on June 18 and the stock is down 7% since then. I'm quite sure today's note will cause FORM another 1 to 2 points worth of damage.

FORM 1-yr chart: