FormFactor Remains a Mean Bouncer After Q4 Results

FormFactor Inc (NASDAQ:FORM) is likely going to be in focus this morning after reporting its CQ4 results last night. We have two firms out with downgrades and two major firms out with wonderful defenses:

- Broadpoint is lowering their rating to Neutral from Buy saying they expected the company to at least maintain its position in DRAM while taking share in the NAND Flash advanced probe card market in 2008. However, the company's failure to ramp volume production of its new Harmony probe card family has resulted in missed opportunities in both market segments. These missteps are exacerbating an already weak outlook for DRAM customer spending in 2008.

- Piper Jaffray is also lowering their rating to Neutral from Buy saying the protracted Harmony ramp delays in 2H07 have resulted in market share losses, that will likely not rebound until the DRAM industry regains profitability, and restarts capacity expansions and design transitions. The good news is that customer design transitions occur frequently and FORM has an opportunity to win back share in 2H (albeit at potential lower ASPs). Recommends sidelines until they see signs of improving DRAM market conditions. Expects better DRAM supply demand balance exiting 2008 and continued strong Flash. Target is lowered to $18 from $23.

- Cowen notes FORM will likely get killed on the significant reduction in the outlook and their admission that there's been some share loss. Only time will prove that there is a secular competitive issue here or if this is simply a cyclical phenomenon. After hours the stock was indicated at ~$18 or about 1.5x cash. Given that they don't expect FORM to burn cash beyond Q1, today's opening will likely be a very attractive entry point but this market has yielded many cheap stocks -- some with less moving parts than FORM. Firm notes they rode this one down and we're not going to downgrade here, but until visibility improves a bit, they think there's little reason for most investors to play unless they are longer term value investors who can wait for this market. Growth investors (this has been a strong growth name) might punt....

- Morgan Stanley maintains their Overweight rating on FORM despite a more aggressive cyclical near-term slow-down in demand for their products, given cutbacks in DRAM customer spending patterns. They remain confident in their FORM thesis, as they see the company well positioned to grow in a fast growing market ~ 20% y-y (over a multi-year period) as the secular trend of improving test efficiency (through test parallelization), enabled through the use of FORM’s proprietary technology, drives above peer average growth in revenues and profitability. Firm would be buyers of the stock on any weakness as they believe the market is overestimating the magnitude of the near-term slowdown. Their global memory team’s view on memory supply/demand indicates an improving fundamental outlook in 2H08 for memory suppliers and for FORM. Lowers target to $30 from $43.

- The most wonderful defense comes from Citigroup saying they suggested a month ago this wasn't going to be pretty and cut the figures, but this was an unmitigated disaster and worse than they ever could have imagined. In checks around the industry post-call, in the past few weeks DRAM makers are in all-out desperation to save dollars and, in some cases, are just not testing any more (thus not buying any probe cards). While pricing is also a factor here, MJC has been the only game in town at the high-end for full wafer contact and thus, FORM has been forced to concede pricing at the low-end. However, Citi thinks it's now regaining quals at high-end for Harmony DRAM. While difficult to defend the stock on near-term fundamentals, they think design activity at DRAM makers has accelerated in recent weeks and - if it holds - adds a much stronger fundamental case for FORM as it would drive big upside to CQ2:08 revenues. While massively cutting numbers (C08 from $1.62 to $0.20 and C09 from $2.14 to $1.49) due to guide, they're sticking with the Buy given ~$14 in tangibles, book and ~$10 net cash (even after 1H:08 charges/losses) and ~$0.70/shr in trough ('08) EBITDA (incl. options) suggesting strong valuation support at ~$15-16 (or <10%).

Notablecalls: I think that after going over the comments, most of you agree this is a very interesting situation.

In a normal tape, I'd be all over FORM, calling for a multi-point bounce. Yet, the action in SIRF has made me a bit more wary. Here's how I see it:

- Weakness in DRAM is no surprise, given the decline in spot prices and results/comments issued by several DRAM players.

- On the other hand, several DRAM makers have been producing below cash cost, which has historically been a sign of bottoming in the sector. A kind of a Darwinian approach. Micron (MU) stock has been on the rebound lately, if you haven't noticed.

- FORM management was smart enough to raise cash when the stock was still trading close to $40, so they have $10-12 worth it on their balance sheet. It's kinda surprising we didn't get a buyback announcement last night but I bet we will see one in the near term. This would surely help the stock.

- FORM continues to be an analyst darling and a mean bouncer. It's now (pre-market 2/6) trading a tad below its 5-year (all-time) lows. My gut tells me it's a keeper at around $17. Let's see how it works out.