Factoring In Some Bad News

A 5% price decline is rarely something for investors to cheer about. But considering just how bad Tuesday's news was, it's a wonder that FormFactor (Nasdaq: FORM) didn't fall further than it did.

On Tuesday, this long-standing Motley Fool Hidden Gems recommendation hit shareholders with a deluge of bad news. Taking it point by point, here's what we know.

By the numbers
FormFactor lopped about 13% off its sales estimate for the first quarter of 2008 and now predicts that it will book just $65 million or $66 million in revenue. Worse still, the operating margin earned on that revenue is dropping, in part because of about $4 million in severance costs that FormFactor will incur when it lays off 12% of its workforce next quarter. By the time we reach the bottom line, FormFactor expects to report a net loss "greater than its previous forecast of $0.15 to $0.25 per share."

Sales look pretty weak all through the first half of 2008, as well. FormFactor advises that it booked $66 million in new orders this quarter -- just enough to replace the revenue it booked. In fact, FormFactor came out and said as much: "The company believes these conditions that impact revenue will continue to exist at least through the first half of 2008."

Why? FormFactor says that certain unspecified customers -- the company services Intel (Nasdaq: INTC) and Infineon (Nasdaq: IFX), that we know of -- are delaying "test capacity expansions and technology transitions, and [taking] additional actions to reduce costs." That could explain part of the margin compression FormFactor complained about.

As a side note, you might expect FormFactor's customers to squeeze all wafer testers equally, in a search for price concessions. Yet only one of FormFactor's key competitors, Advantest (NYSE: ATE), is seeing its stock suffer alongside FormFactor's. In contrast, Cascade Microtech (Nasdaq: CSCD), rose yesterday.

Foolish takeaway
Regardless of how its competitors are faring, though, what should a Fool think about FormFactor itself? As fellow Fool Anders Bylund argued back in February, the stock looks incredibly cheap with a trailing price-to-earnings ratio of 13 and growth projected at nearly 20%.

But although I've often wanted to own the stock, its history of rarely generating free cash flow anywhere near its purported GAAP earnings has always scared me off. Today, it's looking as though cowardice was the better part of valor on this one.