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PMC-Sierra drags down chipmakers

    PMC-Sierra (Nasdaq: PMCS) rattled shares of communications chipmakers Friday after the company said a severe inventory correction and slumping orders from telecommunications carriers will dent sales and earnings.

    Analysts downgraded PMC-Sierra and also cut targets on Broadcom (Nasdaq: BRCM) and Applied Micro (Nasdaq: AMCC) based on the negative outlook.

    PMC said orders came to a screeching halt in the second half of the quarter when its largest customers, such as Lucent Technologies (NYSE: LU), which makes up 10 to 15 percent of sales and Cisco Systems (Nasdaq: CSCO), which makes up 25 to 30 percent of sales, canceled or delayed orders for the first quarter.

    Analysts came down hard on the stock Friday, noting that while other chip suppliers have already cited inventory woes for, PMC's outlook is significantly worse.

    The company's fourth-quarter earnings report was actually quite solid, but analysts and investors were reacting to the company's guidance and gloomy comments made on its conference call Thursday.

    “We believe we’re in the midst of a severe but temporary inventory correction,” said Chief Financial Officer John Sullivan during the call. Sullivan told analysts to expect sales of between $160 million and $170 million in the first quarter and earnings of between 13 cents a share and 15 cents a share. That's well below previous expectations; First Call Corp. consensus was expecting first-quarter sales of $257 million and earnings of 37 cents a share.

    Though many analysts downgraded the stock and revised estimates, their target prices were still above PMC's current price. Shares were down $31.25, or 33 percent, to $64.63.

    Analyst Karl K. Motey at CE Unterberg Towbin downgraded to "buy" from "strong buy'' and had a 12-month target price of $110.00 per share.

    BMO Nesbitt Burns analyst Brian J. Piccioni downgraded to ``market perform'' from ``outperform'' and reduced his 12-month target price to $71.50 from $159.00 per share.

    Salomon Smith Barney analyst Clark Westmont maintained his rating based on the punishment he already expected from investors. "Considering where the stock is likely to open Friday morning, we are maintaining our "buy" rating but cutting our price target from $325 to $85," he said in a research note.

    PMC's outlook also rattled shares of its competitors; it incited analysts to slash price targets on Broadcom (Nasdaq: BRCM) and Applied Micro Circuits (Nasdaq: AMCC), and investors to pummel stocks of several others.

    Broadcom has already reported December results, and said growth looked high for the March quarter. But Salomon analyst Westmont cut his price target on to $125 from $200, based on PMC's outlook alone.

    "Broadcom serves a fairly different market than PMC-Sierra, but the P/E (price to earnings) multiple will be compressed until communications demand and inventory questions are cleared," the analyst wrote. PMC has 40 percent of its sales with Cisco and Lucent, whereas Broadcom has just 12 percent.

    Westmont also dropped his price target on Applied Micro Circuits (Nasdaq: AMCC) to $95 from $125. Though Applied Micro gets just 13 percent of its business from Cisco and Lucent, PMC's negative guidance "raise questions about the sustainability of (its) growth," Westmont said.

    Applied Micro's shares were off $5.69 to $72.31.

    PMC management has said it believes the chip companies that are most involved in the affected areas are Lucent Microelectronics, Infineon (NYSE: IFX) and TranSwitch (Nasdaq: TXCC), which was off $6.25 to $72.31 Friday.

    SG Cowen Securities analyst Rick Billy maintained his "buy" rating on TranSwitch Friday but revised earnings expectations downwards for 2001 based on "the major revisions in our outlook for its nearest competitor, PMCS."

    Westmont also said he remained cautious on other chip stocks like Altera (Nasdaq: ALTR), off $1.75 to $ 27.94 and Xilinx (Nasdaq: XLNX), off $1.25 to $ 51.13, on which he has already trimmed price targets and estimates.

    "The group's P/E multiples are likely to remain compressed until end market demand improves, most likely after the June quarter," Westmont predicted.