Shares of Freescale Semiconductor (NYSE: FSL ) hit a 52-week low last Friday. Let's take a look at how the company got there to find out whether cloudy skies remain on the horizon.
How it got here
Freescale isn't the only chip maker feeling the heat. Since its IPO about a year ago, few of its competitors can even boast positive returns. That's not much comfort for Freescale, which has been one of the worst-performing chip makers in the industry:
It certainly hasn't helped Freescale to have consistently negative earnings. Its free cash flow has barely nudged above zero in the past few years, either, which puts the company in dangerous waters, surrounded by extremely well-equipped companies like Intel (Nasdaq: INTC ) and Taiwan Semiconductor (NYSE: TSM ) , which also boast their own fabrication facilities.
What you need to know
Most semiconductor companies don't burn money every year, they make it -- and many distribute some of it to shareholders each quarter. That goes a long way toward explaining why Freescale has free-fallen while its peers are increasingly seen as "buying opportunity," especially as their prices have declined.
3-Year Annualized Earnings Growth
Net Margin (TTM)
|Texas Instruments (NYSE: TXN )||17.4||7.2%||13.6%|
|Qualcomm (Nasdaq: QCOM )||16.6||45.8%||9.3%|
Source: Yahoo! Finance.
Investors seem to be spooked by mounting evidence of a global economic slowdown. Even in bad years, though, most of Freescale's competitors can at least maintain their operations without going belly up. There's no guarantee that Freescale can survive another grinding recession, as it has less than a half-year of operating expenses in currently available cash.
Freescale's focus on supplying automakers and industrial clients makes it particularly susceptible to downturns, since large-ticket items are likely to be forgone before a cell phone or laptop upgrade. That explains -- at least in part -- Texas Instruments' and Qualcomm's higher valuations relative to Intel, which hasn't quite cracked mobile yet. Still, a wide economic slump will swamp all boats. Freescale's just happens to be half-full of water already.
Where does Freescale go from here? That will depend primarily on the economy's direction and to a lesser extent on Freescale's ability to diversify into stabler sectors. The Motley Fool's CAPS community doesn't think much of Freescale, with a small number of Fools giving the company a three-star rating. No Freescale bulls have earned any CAPS points for their pick yet, and they may wait a lot longer for that possibility.
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