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Cisco inventory concerns rattle chip stocks

Cisco Systems (Nasdaq: CSCO) slipped Tuesday after its first-quarter report, while its statements about inventory levels spurred a ripple of analyst actions and falling communications chip stocks.

Shares in Cisco were down 1.4 to 53.72 following the company's report. Shares of PMC-Sierra, Broadcom, Altera and Xilinx were also headed south as analysts said Cisco's report confirmed their fears about inventory levels at communications systems companies.

Cisco reported strong first quarter results, beating estimates for earnings with strong revenue. The company also raised guidance.

Wit Soundview reiterated a "strong buy" rating and $80 price target on the stock Tuesday, and raised earning estimates for fiscal year 2001 to be in the middle of Cisco's new projected range. "The company believes it has never been better positioned to supply Enterprise and Service Provider customers with products for IP networks that offer the convergence of voice, data and video on a single network," according to Wit's report.

Chase H&Q and Deutsche Banc Alex Brown also reiterated "strong buy" ratings on the stock.

But good news for Cisco isn't necessarily good news for suppliers and competitors. On a conference call, the company said lead times for components are relaxing, and the company will whittle down its inventory over the next two quarters.

Cisco confirmed fears that communications systems companies have over-booked components throughout 2000 in an attempt to avoid component shortages. Inventory will decrease over the next two quarters, said Jim Liang, an analyst at W.R. Hambrecht. Liang predicts an inventory correction could occur in the communications chip space in the March 2001 quarter, and revised his ratings and estimates for Altera, Xilinx and Broadcom.

Here's a look:

  • Xilinx (Nasdaq: XLNX), down 5 to 67.88, was reiterated as "neutral" by Liang on the "near-term cautious stance towards the communications chip group.

    Analyst Eric Rothdeutsch at Robertson Stephens reiterated a "strong buy'' and Charles F Boucher at Bear, Stearns & Co. reiterated a "buy."

  • Altera Corp. (Nasdaq: ALTR), down 2.5 to 30.81, was also reiterated "neutral" by Liang, who noted that shares were trading at a 40 percent discount to those of Xilinx. Although Altera shares have been discounted already on news of a potential inventory correction, Xilinx's haven't been.

  • Broadcom was dinged on valuation concerns. Liang was harder on Broadcom (Nasdaq: BRCM), downgrading it to "buy" from "strong buy," and lowering his price target from $295 to $250. Broadcom gets 17 percent of revenue from Cisco, Liang said, and "it is unlikely that (it) could go unscathed in the event of an inventory correction." He added that the shares are also richly valued.

    Broadcom was reiterated ``outperform'' by analyst Mark L Edelstone at Morgan Stanley Dean Witter.

  • PMC-Sierra shares were down 24.5 to 129.3125. Analyst Alex Gauna at Banc of America Securities maintained a "strong buy" rating on the stock but lowered its 12-month price target to $225 from $325.

    "Inventory issues raised during the Cisco quarterly conference could have near term implications for PMC-Sierra," said Guana in a report. He also noted that PMC-Sierra’s only customer accounting for over 10 percent of business, Lucent (NYSE: LU), has been struggling with product and management issues.

    However, Gauna added that with a portfolio breadth of more than 70 products with none contributing more than 10 percent of revenue, PMC-Sierra faces only a "modest cooling from white-hot September quarter...(and) trends could be offset by strengths we have overlooked."

  • Shares other networking-equipment companies which were down after Cisco's report included JDS Uniphase Corp. (Nasdaq: JDSU), maker of fiber-optic components, down 3.31 to 74.13; and Juniper Networks Inc. (Nasadaq: JNPR), maker of high-capacity data traffic routers, down 4.88 to 213.94.


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