UPDATE: BofA Merrill Lynch Downgrades Fairchild Semiconductor to Underperform from Neutral, $12.00 PT

In a report published Friday, Bank of America Merrill Lynch analyst Aashish Rao downgraded Fairchild Semiconductor Intl, Inc.

to Underperform from Neutral, with a $12.00 price target. According to the report, the analysts are cautious on FCS as benefits from a cyclical recovery driving gross margin improvements are largely factored into street estimates and are offset by slowing sales growth, pricing pressures and limited margin expansion potential due to rising R&D investments to move up the analog value chain. “We downgrade FCS to Underperform from Neutral on: 1) weak sales growth; 2) persistent GM headwinds from capacity expansion and mix shift; 3) high cost to transform the company away from its commodity/discrete roots; and 4) stretched valuation at 18x 2015E. Deceleration in core its smartphone market results in only 2-4% annual sales growth in our model from 2014-16E, well below semi industry growth of 5-8%,” the report noted. “We lower FY14E/15E by 20c/15c to $0.47/$0.72 and our PO to $12 on 17x CY15 PE, a premium to its 5 year median of 13x given potential restructuring. Risks to our downgrade include $100mn in buybacks and potential capacity/opex cuts that could drive higher leverage.” FCS closed Thursday at $13.15 with shares trading down at 6 percent.