Demand, earnings worries prompt chipmaker downgrades

CS First Boston analyst Charles Glavin downgrades Broadcom, TI and Intel, citing concerns about withering demand and decreased earnings visibility.

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CS First Boston analyst Charles Glavin handed out downgrades to a trio of big-name chipmakers on Tuesday, citing concerns about withering demand and decreased earnings visibility.

Glavin cut communications chip giant Broadcom to "hold" from "buy," slashed 2001 earnings estimates and lowered the company's 12-month price target to $80. The analyst also handed out tough medicine to Texas Instruments and Intel, which were both dropped to "hold" from "buy."

In early trading, shares of the companies moved only about 1 percent. Broadcom fell 38 cents to $80.06. Intel rose 25 cents to $34.81, and Texas Instruments moved up 56 cents to $38.26.

For Broadcom, Glavin said the downgrade and price target cut were based on impaired visibility for end market growth and customer demand, excess chip inventories, a looming Gigabit Ethernet price war, and the effects of aggressively courting customers.

In a research note, the analyst jumped on the company's statement that growth for the first quarter of 2001 would not be as robust as previously forecast. Glavin said that he believes a reduction in orders along with order delays from original equipment manufacturers (OEMs) are extensive. The situation could be compounded, he said, by a further drop in demand from multiple PC vendors.

Glavin also highlighted potential pitfalls in the company's recent acquisition strategy, noting that concerns about expected returns are still an issue.

Broadcom, based in Irvine, Calif., topped analysts' estimates for its most recent quarter earlier this month and raised its sales estimates for the first quarter of 2001.

Worries about TI, Intel
The analyst also cut Texas Instruments, which missed analysts' targets in its fourth quarter and first-quarter estimates. The Dallas-based semiconductor company's rating was reduced to "hold" from "buy" and its 2001 earnings per share targets were cut.

"We are downgrading TI to a hold from a buy, based primarily on valuation," Glavin wrote in his research note. "TI is still trading at twice its 20 (percent) to 25 percent long-term growth rate." The analyst said he believes that there still is a weakness in earnings that has not been fully valued into the stock.

Glavin also pointed out the "significant downside margin risk" that exists for the company with regard to its large fixed asset base in the era of the fabless company model. "We believe TI wanted to take much less output from its foundries...than it actually has to, and did not shut off its internal production quickly enough to counter weaker demand," the analyst wrote.

Intel was downgraded to a hold from a buy because a substantial recovery for 2001 is unlikely for the company, he wrote. Glavin was among the last analysts to downgrade Intel, which started to fall in September.

Earlier this month, the Santa Clara, Calif.-based chip giant squeaked past lowered fourth-quarter earnings expectations but forecast a 15 percent decrease in revenue for the first quarter of 2001 compared with the fourth quarter of 2000.

Weaker end markets for desktops, servers and laptops, the continuing aggressive pricing environment for chips, and snags in the production of the company's Pentium 4 chip all contributed to the situation, the analyst wrote.