Chips and Dip: Broadcom Stock Off Another 15%

Broadcom Corp. shares fell 15% Thursday amid a rash of falling stock prices in the communication chip making industry as worries resurfaced about slowing corporate earnings and one Wall Street analyst downgraded a number of stocks.

Irvine-based Broadcom has been taking one of the biggest hits this month after major customer Cisco Systems Inc. said its inventory of raw materials had risen, suggesting that orders for chips would be reduced in the coming months.

Broadcom’s stock has lost 35% of its value so far this month, dropping $25.19 Thursday to close at $144.50 a share on Nasdaq.

The sagging communications chip sector led the tech-laden Nasdaq market to lose 133.61 points Thursday, ending at 3,031.88.

Stoking more fears about the sector Thursday was a downbeat assessment of future sales at chip equipment maker Applied Materials Inc., which, like Cisco earlier, had posted good quarterly results.

And exacerbating the slide this month, analyst Joe Osha at Merrill Lynch & Co. cut ratings on Broadcom and other companies--like Applied Micro Circuits Corp., PMC-Sierra Inc., TranSwitch Corp. and Vitesse Semiconductor Corp.--to “accumulate” from “buy.”

Osha maintained his rating on Conexant Systems Inc., 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.

“The more of these downgrades and earnings reductions there are, the more skepticism it puts in the minds of investors,” said Andrew Abrams, who helps oversee $200 million at hedge-fund manager CWH Associates.

For some, stock prices have been falling for a few months, reducing the net worth of so many executives and employees who own stock and options.

Broadcom’s stock has fallen 47% from its high this year of $273.63 a share in August, nearly cutting in half the wealth accumulated by co-founders Henry T. Nicholas III and Henry Samueli, the two richest Southern Californians, according to Forbes magazine.

In a report, Osha cited high inventory levels at Cisco and other equipment manufacturers for his 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 telecommunication chips will just make analysts’ profit estimates, and may not tell them to raise forecasts for future quarters, as they have for the past six quarters, said Osha, an analyst well-regarded by money managers.

“It’s an additional negative laid on a group that’s already suffering from a slowdown of capital spending,” said Timothy Stives, who helps manage about $1 billion for Nikko Global Asset Management and holds shares of Broadcom and Vitesse.

But 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 sells for 143 times this year’s estimated earnings. That’s five times more than programmable computer-chip maker Altera Corp., which sells for 29. Applied Micro sells for 115 times, PMC-Sierra is priced at 110 times and TranSwitch has a price-earnings 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.”

But for Thursday, the stocks took more hits.

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.

Reuters and Bloomberg News were used in compiling this report.