Freescale Semiconductor Holdings (NYSE:FSL) could be a potential acquisition target due to its attractive assets in the semiconductor space.
Freescale, which was once the semiconductor products business of former Motorola, is one of the leading makers of microchips. It also makes microcontrollers, sensors, analog ICs and connectivity, and caters to the automotive, consumer, industrial, and networking markets. The companies clientele includes blue-chip companies such as Alcatel-Lucent (NYSE:ALU), Huawei, Cisco Systems (NASDAQ:CSCO), Fujitsu and Nokia Siemens Networks.
Freescale possesses attractive assets either in whole or in parts, which would provide valuation support. Larger credit worthy suitors could hypothetically absorb debt while leveraging Freescale's net operating losses for future tax advantages. Companies could either apply net operating loss to its past tax payments to receive a tax credit or it could apply the net operating loss to reduce future income tax payments.
The company could be attractive to lot of semiconductor giants as its diverse portfolio of assets would be suitable for the makers of both PC chips and smartphone chips.
"Although we are not aware of any suitors currently, we could see a potential fit at some point with Intel and Qualcomm, Texas Instruments, and Microchip, among others," RBC Capital Markets analyst Doug Freedman wrote in a note to clients.
Freescale's radio frequency products, network processors plus base station-on-chip products would fit well with Intel Corp. (NASDAQ:INTC) and Qualcomm, Inc. (NASDAQ:QCOM). Meanwhile, Texas Instruments (NASDAQ:TXN) and Microchip Technology, Inc. (NASDAQ:MCHP) could benefit from Freescale's microcontrollers.
In addition, shares of Freescale are set to rise as a result of potential EPS upside ahead given the upcoming acceleration of industry order and investors should take advantage of recent pullback from about $18 in mid-Feb.
Freedman said that once demand drivers in the second half become more transparent, EPS estimates for 2013 could accelerate to more than $2.00 as valuation windows roll into stronger quarters given the rising revenues and operational efficiencies.
"We encourage investors accumulate shares for potential earnings power in 2013 as we believe the company's EPS growth is set to accelerate beginning 2H12 purely on modest top-line growth," said Freedman, who upgraded Freescale shares to "outperform" from "sector perform."
In 2011, Freescale's net loss narrowed to $410 million or $1.82 per share from a loss of $1.05 billion or $5.35 per share in calendar year 2010. Adjusted net earnings were $217 million, or 96 cents per share, compared to an adjusted net loss of $20 million, or 10 cents per share, last year. Net sales grew to $4.57 billion from $4.46 billion in 2010.
Shares of Freescale closed Monday's regular trading session down by 24 cents, or 1.60 percent, to $14.79 on the New York Stock Exchange. Freedman has increased his price target by $5 to $20.