Thread, PMCS has been on a tear for about a year, but, in the opinion of some, it isn't over. here is a post from the PMCS thread from H&Q. Note the part about how the CSCO acquisition of Stratum is good for PMCS. Price target is $100. I think we may see that within 30 days.
To: Stonehenge (2594 )
From: Nevin S. ( Ignore ) Sunday, Jul 18 1999 2:06PM ET
Reply # of 2596
From Hambrecht & Quist 7/16/99:
July 16, 1999 - 9:36am
Hambrecht & Quist
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**** Hambrecht & Quist **** Hambrecht & Quist **** Hambrecht & Quist ****
Company: PMC-Sierra Incorporated
Price: 70
Recommendation: Buy - Focus List
Notes: a,b,f
Date: 7/16/99
Over the Top Quarter; Adding to Focus List
PMC-Sierra reported $59.3M/0.23, significantly ahead of our $54.9/$0.18 and the $0.19 consensus estimates. The market outlook for broadband systems and chips remains extremely robust. Design win momentum continues, bookings reached record levels, and visibility remains good. We are raising our estimates from $0.76 to $0.91 for FY:99 and from $0.98 to $1.23 for FY:00. Considering market fundamentals, the Company's strong and defensible position,
and potential for upside, we are adding PMCS to our Focus List and setting a $100 six-month price target.
1998 A 1999 E 2000 E
Q1 EPS $0.14 $0.18 $0.28
Q2 EPS 0.16 0.23 0.30
Q3 EPS 0.15 0.25 0.32
Q4 EPS 0.17 0.27 0.33
FY EPS 0.61 0.91 1.23
FY REVS (M) 162 249 372
CY EPS 0.61 0.91 1.23
CY P/E NM 77x 58x
FY Ends Dec Current Price $70.00
52-Week Range $23-71 Market Cap(M) $5,082
Shares Out(M) 72.6 Book Value $2.29
Net Cash/Share $2.07 CY00/99 EPS Growth 35%
CY00 P/E-to-Growth 166%
Q2 Results: PMC-Sierra reported $59.3M/0.23 (net of one-time charges and gains, and depreciation and amortization), significantly ahead of our $54.9/$0.18 and the $0.19 consensus estimates. Core networking business grew 67% Y/Y and 16% Q/Q. Gross margin remained stellar at 77.9%, 90 bps above our estimate, and down only slightly Q/Q. For networking products, gross margin actually rose to 80.7% from 80.1% sequentially. Operating expenses were down as a percentage of revenue as the Company realized operating leverage on strong sales. On the balance sheet, DSOs declined (again) sequentially from 44 to 36. Inventory turns remained essentially flat at 10.1.
A clear majority of PMC's revenue came from a broad base of more than 50 products, up from 40 last quarter, and none of these contributed more than 10%. Cisco and Lucent (including Ascend) each accounted for more than 10%. Design win momentum continues, with more than 350 for the second quarter in a row. All product areas grew, and bookings increased to record levels. The Company received some of the largest new product sponsorship contracts in its history, which bodes well for visibility. Overall, management believes visibility is good, with book-to-bill solidly over 1.0. Importantly, we believe inventory levels at major customers have not risen appreciably, if at all.
VORTEX - a great way to leverage xDSL momentum: We view the VORTEX
chipset as one of the best ways to play xDSL. This chipset enables DSLAM vendors to design products with significantly higher density, lower power consumption, and improved reliability. With the VORTEX, PMC will avoid the instensely competitive xDSL chip market, yet leverage market growth with higher margin products. We believe some of the 12 vendors that had initially been evaluating the VORTEX product have converted to customers. Longer-term, this product has potential for 3G wireless and other applications. We are aware of no similar product on the market, and estimate it could yield upside
in our 2H:00 numers.
StratumOne-Cisco deal beneficial to PMC-Sierra on the margin: Late last quarter, Cisco announced it will a quire StratumOne, a private supplier of broadband networking chips. We viewed StratumOne as one of the most viable private communications chip suppliers. We believe the StratumOne-Cisco deal is marginally positive for PMC-Sierra. Other system vendors (Cisco competitors) that had been working with StratumOne can no longer do so, presenting an opportunity for PMC. Also, system suppliers may be less likely to outsource key designs to certain start-ups, fearing they may be acquired by a competitive system vendor.
Broadband momentum buoys outlook: In our view, the outlook for broadband infrastructure is extremetly positive. The increasing ubiquity of broadband services and access equipment, such as cable modems and DSL, is taxing core infrastructure and necessitating significant new builds and extensive upgrades with high capacity, highly functional equipment that can accommodate multiple
bit rates and protocols. Additionally, the next generation of equipment is more integrated (e.g., some of the most interesting equipment we have seen integrates both telecom and datacom functionality) and will require a greater amount of sophisticated silicon. Also, new generations of network equipment utilizing advanced optical technologies rely heavily on electronics, a trend
we believe will continue to benefit PMC-Sierra. Even with the move toward optical networking, the requirement for sophisticated communiations silicon increases. In fact, almost every "next generation system" private vendor we track uses PMC-Sierra silicon and speaks extremely highly of the Company's silicon and system capabilities.
To leverage these opportunities, and the trend toward increased levels of outsourcing by system vendors, PMC plans to maintain new product introduction momentum going forward. To achieve this, the Company plans to add about 130 design, marketing, and sales staff over the next half-year. One of the areas we project the Company will focus on in the near-term is higher speed SONET (OC-48, and OC-192 in the longer-term).
Raising numbers, one of our best long-term ideas, adding to Focus List: Given PMC-Sierra's strong performance this quarter and positive outlook for the broadband infrastructure market, we are raising our estimates again from $59.0/0.19 to $66.5/0.25 for the September quarter, from $228/0.78 to $249/0.91 for FY:99, and from $315/0.98 to $372/1.23 for FY:00. We believe the Company is likely to post upside to these numbers, especially in FY:00.
Table 1 - PMCS Comparables
PMCS $70.00 $0.91 $1.23 76.7x 56.8x 35% 162%
Source: H&Q Estimates, First Call
PMC-Sierra's current valuation of 56.8x our CY:00 estimates is certainly not cheap. We believe the most relevant comparables are high-quality broadband component names, such as Applied Micro Circuits, Broadcom, TranSwitch, Vitesse, and JDS Uniphase. Excluding outliers, these comps are trading at 60-70x CY:00 estimates. Given market fundamentals, PMC-Sierra's extremely strong and defensible position, and potential for upside, we believe PMC-Sierra should trade at the high-end of this range, implying an $86 near-term price
target. We are setting a six-month price target of $100 and adding PMCS to our Focus List
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