Stocks of Communications Chip Firms Drop on Ratings Downgrade
Broadcom shares fell 15% Thursday as worries resurfaced about slowing corporate earnings in the communications-chip-making industry and one Wall Street analyst downgraded a number of stocks in the group.
Shares of Irvine-based Broadcom (ticker symbol: BRCM) have fallen 35% this month. Major customer Cisco Systems (CSCO) said last week its inventory of raw materials had risen, suggesting that orders for chips would be reduced in the coming months. On Thursday, Broadcom fell $25.19 to close at $144.50 a share in Nasdaq trading.
Stoking more fears Thursday was a downbeat assessment of future sales at chip equipment maker Applied Materials (AMAT), which, like Cisco earlier, had posted good quarterly results.
Merrill Lynch analyst Joe Osha cut ratings on Broadcom and related companies such as Applied Micro Circuits (AMCC), PMC-Sierra (PMCS), TranSwitch (TXCC) and Vitesse Semiconductor (VTSS) from “buy” to “accumulate.”
Osha maintained his rating on Conexant Systems (CNXT), but lowered his target for the Newport Beach chip maker’s stock price in the next 12 to 18 months to $55 a share from $75 a share. Conexant stock promptly lost $4 Thursday, or nearly 13%, to close at $27.75 a share on Nasdaq.
Applied Materials lost $1.13 to close at $41.63 a share, Applied Micro plunged $10.06 to close at $60.94, Cisco dropped $2.50 to close at $51.06, PMC-Sierra dropped $18.13 to close at $113, TranSwitch Corp. fell $7.19 to close at $38.06 and Vitesse lost $4.94 to close at $65.75.
Osha cited high inventory levels at Cisco and other equipment manufacturers for his ratings changes. Chip inventories “could be as much as 40% higher than historical norms,” Osha wrote, putting a burden on the shares for the next one or two quarters.
At best, makers of telecommunications chips will just make analysts’ profit estimates and may not tell them to raise forecasts for future quarters, Osha wrote.
Even after declines of 50% in recent weeks, communications chip stocks have the highest share price relative to earnings of any group of semiconductor stocks, Osha said in his report.
Broadcom now sells for 143 times this year’s estimated earnings. That’s five times more than programmable computer-chip maker Altera (ALTR), which has a P/E ratio of 29. Applied Micro sells for 115 times, PMC-Sierra is priced at 110 times and TranSwitch has a P/E ratio of 81.
Osha said in a note Thursday that he still believes the “Internet, deregulation and the move to outsourcing silicon will provide strong demand for the [communications chip] group over the next several years.”
(Reuters, Bloomberg News)
IRS to Close Down Stock Tax Shelter
Calling corporate tax shelters “perhaps the most serious” tax compliance problem in the country, Treasury Secretary Lawrence Summers announced Thursday that the IRS is shutting down a stock compensation arrangement that generates artificial losses.
The notice, to be issued Friday by the Internal Revenue Service, is the latest in a series of Clinton administration attacks on tax shelters, but Summers said they merely hint at a problem that costs the Treasury many “tens of billions” of dollars over a 10-year period.
The shelter being shut down Friday involves what Treasury Department officials described as a “circular” stock transaction intended to boost a company’s losses and increase tax deductions it can take.
In such an arrangements, a parent company sets up a stock compensation plan for employees. Instead of buying the stock and simply transferring it to those workers, the parent contributes cash to buy the stock to a subsidiary--which purchases the shares and distributes them to the parent’s employees. The parent company claims a deduction for the loss of the cash contribution to its subsidiary and a second deduction for loss on the sale of the stock.
(Associated Press)
Seeking Partner, PSINet Hires Goldman Sachs
PSINet (PSIX) has hired Goldman Sachs (GS) to help it find a strategic partner, or even a buyer, the company said Thursday.
The Web site hosting company, which offers a range of Internet services and electronic commerce infrastructure, also said a bank is selling PSINet shares pledged to it as security for a loan to William L. Schrader, PSINet’s chief executive.
On Nov. 2, PSINet said a slowdown in spending in the Internet sector was forcing it to cut capital spending. It announced plans to sell stakes in its Xpedior unit and certain consulting operations. The company recorded more than $1.1 billion in write-downs to cover losses it expected from the sales. The charges led to a third-quarter loss of $7.34 a share, or $1.4 billion.
The company also said its fourth-quarter earnings would fall short of expectations. Shares of PSINet rose 19 cents to $2 in Nasdaq trading. (Bridge News)
Ticker Talk
BellSouth (BLS), the dominant local phone company in the Southeast, said late Thursday it expects earnings per share to grow by 7% to 9% next year, down from previous estimates of 13% to 15%. BellSouth’s shares tumbled more than 8% in after-hours trading before recovering to $49.19, down slightly from the daily close of $49.25.
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Chip Dip
Semiconductor stocks took a dive Thursday after Merrill Lynch downgraded several chip-related stocks. The Philadelphia semiconductor index lost more than 5% on the day.
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Thursday: $675.05, down $39.95
Source: Bloomberg News
