How fares the semiconductor market? Your answer likely depends on which companies you own. If you're an AMD (NYSE:AMD) shareholder, semiconductors probably look pretty good to you these days. If you're a member of the Intel (NASDAQ:INTC) -igentsia, maybe not so much. For those looking at the larger picture within the industry, tomorrow you'll get to add one more chip to the semiconductor puzzle, as semiconductor probe card maker and Motley Fool Hidden Gems pick FormFactor (NASDAQ:FORM) reports its Q4 and full-year 2005 earnings.

Wall Street Wisdom:

  • General consensus. A full dozen analysts follow FormFactor, where "buy" ratings outnumber "holds" and "sells" combined by 2-to-1.
  • Revenues. One reason for the optimism is that reported revenues are expected to skyrocket tomorrow -- up 43% to $65.9 million.
  • Earnings. Another reason: Profits are thought to have come in even stronger for the quarter. Analysts think FormFactor booked $0.21 per share in profits -- up 50% from the year-ago $0.14.

Margin watch:
The trends in FormFactor's margins, whether it's gross, operating, or net you focus on, do not look encouraging. Over the past 18 months, it's been nothing but down, down, and downer still on all three fronts. If FormFactor comes anywhere near meeting analyst expectations tomorrow, however, it could be the start of an upward rise. $0.21 per share on $65.9 million in revenues would equate to approximately an 12.8% net margin for the fourth quarter -- not as good as FormFactor managed in Q4 of last year, but a sight better than it achieved last quarter.

Margins %

6/04

9/04

12/04

3/05

6/05

9/05

Gross

51.5

51.5

49.3

47.4

44.7

43.5

Op.

22.2

24.0

21.8

19.5

16.3

14.3

Net

13.0

14.2

14.2

13.0

11.6

12.1

All data courtesy of Capital IQ, a division of Standard & Poor's. Data reflects trailing-12-month performance for the quarters ending in the named months.

Foolish lookout:
One other thing Fools should check on tomorrow is inventory management. In each of the past two quarters, FormFactor's sales increased by 21% over their year-previous numbers. Meanwhile, inventory levels far outstripped sales growth, rising by 33% year over year in Q2, and 42% in Q3. That's ordinarily a danger sign, and I'm not entirely convinced it's not so here. However, it's worth noting that FormFactor's inventory rise is almost entirely comprised of raw materials and works in progress (suggesting strong anticipated demand for its wares), as opposed to finished goods. If your company is growing inventories, these are the kinds of inventories you want to see grown.

FormFactor is a Hidden Gems pick. Try a 30-day free trial subscription and get access to the best stock ideas in the world of underfollowed small caps.

Fool contributor Rich Smith does not own shares of any company named above.