Market Overview

Street says Freescale has Promise (and Debt)

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Many traders see promise in Freescale Semiconductor (NYSE: FSL), which opened on Wednesday at $19.53. In fact, China Analyst claims that Freescale Semiconductor is "the best-rated stock in [its] segment of the market." This may be a bit of an exaggeration, considering the competition the company faces, but it may highlight broader market sentiment.

Freescale share values have reflected interest from traders since its initial public offering on May 26. That day, shares of the company closed at $18.33. The stock has increased in price since, and presently trades near $19.50. Freescale manufactures chips for a broad range of sectors including automotive, consumer, industrial and networking. They have been quite active in the automotive sector and are currently pushing into the mobile sector. As a result, the company has seen its revenue grow 16.7% from the first quarter of 2010 to the first quarter of 2011, although it did post a loss of $148 million.

Despite the loss, Freescale may experience continued growth in the coming years should its new releases like the Xtrinsic pressure sensor and quad-core ARM processor take hold.

Investors may see an opportunity for growth, especially in the mobile landscape where the products Freescale offers may bring a great deal of revenue. Alongside their new technologies, Freescale is also slated to launch a revamped set of chips for networking, power management, and sensing technology.

Optimism surrounding Freescale is tempered by one primary concern: Freescale currently carries a massive debt burden—roughly $5.5 billion—as a result of a leveraged buyout in 2006.

The company's leadership acknowledges this, and has taken steps to consolidate and reduce its debt over the coming years. The hope is that Freescale can reduce the risk that debt poses to the company and get the stock out of speculative territory. According to Barrons, Freescale has restructured its debt so that "there are no significant maturities before 2016," a strategy Freescale is using to keep its debt burden under control.

At the moment, Freescale's main concern is to demonstrate that it can adequately manage its debt burden. If the Freescale is successful in that endeavor, investors may see a lucrative growth story in the company.

ACTION ITEMS:

Bullish:
Investors who believe that Freescale's new offerings will help strengthen the company might want to consider the following trades:

  • Pick up Freescale shares now, before concerns about its debt dissipate
  • Hold onto Freescale shares, as the company's plan to pay down debt and build growth is for the long-term

Bearish
Investors who believe that Freescale cannot manage its debt may consider these alternate positions:

  • Consider investing in Texas Instruments (NYSE: TXN), a major player in semiconductors, especially ARM processors, and a potential competitor to Freescale
  • ProShares UltraShort Technology (NYSE: REW) is an ETF which attempts to produce a return corresponding to the general weakness of the technology sector. If tech stocks are performing badly, REW may do well.

Neither Benzinga nor its staff recommend that you buy, sell, or hold any security. We do not offer investment advice, personalized or otherwise. Benzinga recommends that you conduct your own due diligence and consult a certified financial professional for personalized advice about your financial situation.

 

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