Broadcom, communications chip stocks hit by downgrade

Broadcom (Nasdaq: BRCM) and other makers of communications semiconductors fell sharply Thursday after downgrades from Merrill Lynch.

Broadcom, down 16.69 to 153, Applied Micro Circuits Corp. (Nasdaq: AMCC), down 5.81 to 65.19, PMC-Sierra (Nasdaq: PMCS), down 13.38 to 117.75, Transwitch Corp. (Nasdaq: TXCC), down 4.28 to 40.88, and Vitesse (Nasdaq: VTSS), down 3 to 67.6875 were all downgraded to near-term "accumulate" from "buy" by analyst Merrill Joseph Osha.

The downgrade was based on "inventory concerns, and (the) belief that there is no near-term catalyst for the group," Osha stated in a research note.

Osha said he believes "the combined inventories at equipment OEM's (original equipment manufacturers) could be as much as 40 percent higher than historical norms."

While he maintained December 2000 quarter estimates, Osha said he expects a correction due to inventory build sometime over the next two quarters.

In a best-case scenario, the correction would lead to communications IC companies just hitting estimates, and not raising forward expectations, something Osha said will negatively impact the sector.

Osha's long-term buy rating remained intact, however. "We still believe that the Internet, deregulation, and the move to outsourcing silicon will provide strong demand for the group over the next several years," he stated.