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Analysts rally around chipmaker Vitesse

The communications chipmaker gets a lot of play after analysts dish out encouraging words, helping the stock make decent gains earlier in the week.

    Communications chipmaker Vitesse Semiconductor got a lot of play this week after a couple of analysts dished out some encouraging words, helping the stock make decent gains despite Friday's sharp sell-off.

    Yet very few people outside of the industry even recognize Vitesse or have a clue as to what it is it does.

    Applied Micro Circuits and even Broadcom are, by Wall Street standards, household names. And yet Vitesse has been a publicly traded company for more than nine years, compared with about three years each for Broadcom and Applied Micro.

    Unlike Broadcom and Applied Micro, which both took flight early in their public lives, Vitesse stumbled out of the gates. The stock spent most of the early '90s below $10 a share, including a prolonged malaise below $1 a share.

    After figuring out that the high-end computing business wasn't where it wanted to be, Vitesse moved into the communications-chip sector and has never looked back.

    Camarillo, Calif.-based Vitesse cranks out the chips that companies such as Cisco Systems, Lucent Technologies and IBM use in their network and automatic test equipment.

    Considering the recent warnings from Nortel, Lucent and Cisco, it would appear that Vitesse might be a volatile stock.

    But its gallium arsenide circuits are more complicated to manufacture but deliver faster performance than their silicon brethren, a key selling point as data communications continues to evolve and converge at a frantic pace.

    On Thursday, Robertson Stephens analyst Arun Veerappan upgraded the stock from a "buy" to a "strong buy" after the company gave its presentation during the investment firm's technology conference in San Francisco.

    Company executives reiterated their guidance of 10 percent to 15 percent sequential growth for the next two quarters and, according to Veerappan, the company should thrive despite this recent economic slowdown because it will be "turning on two new significant revenue streams before the end of the year," particularly from the switched fabric and forward error correction markets--high-end communications chip applications.

    "I would say AMCC, Broadcom and PMC-Sierra have a higher profile right now because they've had higher growth rates than Vitesse in the past," Veerappan said. "It's my bet that Vitesse will pick up its growth rate in the next year, and its visibility and multiples will expand."

    Earlier this week, UBS Warburg analyst David Wong reiterated his "strong buy" rating even though orders from telecom customers such as Lucent and Cisco are expected to slow in the next couple of quarters.

    Last month, Vitesse topped analysts' estimates when it returned a profit of $47.6 million, or 25 cents a share, on sales of $165.1 million.

    Analysts were looking for a profit of 24 cents a share on sales of $161 million.

    Despite the watered down outlook, most analysts remained confident in the stock's long-term prospects.

    Pacific Crest Securities analyst Aalok Shah did cut the stock from a "strong buy" to a "buy" following the earnings report while others came to the company's defense.

    Prudential Securities analyst John Barton reiterated his "strong buy" rating and a 12-month price target of $100 a share.

    "We expect Vitesse to continue to perform well, driven by a large product ramp in network processors and switch fabric, as well as OC-192," he wrote in a research report. His reference to OC-192 is a networking standard.

    Kaufman Brothers also upgraded the stock from an "accumulate" recommendation to a "buy," meaning all 19 analysts tracking the stock rate it either a "buy" or "strong buy."

    Alvin Kressler, an analyst at Lehman Brothers, said the company's potential more than offsets its valuation at this point.

    "This company is growing at more than 70 percent year-over-year even though its largest customer is having all this trouble," he said. "The newer parts of its business, the high-end optical chips, are starting to do well. From a valuation standpoint, it's a good value now."

    The stock pulled back a bit earlier this week on news that Chief Executive Officer Lou Tomasetta and other high-ranking executives were exercising and selling some of their stock options.

    Tomasetta, according to a filing with the Securities and Exchange Commission, planned to sell 100,00 shares, the same amount he sold back in January for roughly $7.4 million.

    Investors like to make a big deal about insider trading, reasoning that if the people closest to the company are selling shares they probably should too.

    These top executives, however, usually exercise and sell options at regular intervals throughout the year for a variety of reasons.

    Analysts are projecting sales of $760 million in the current fiscal year and a profit of $1.16 a share compared with $441.6 million and 67 cents a share, respectively, in fiscal 2000. The stock is trading at roughly 40 times projected earnings of $1.83 a share in fiscal 2002.