The sole reason for SSB's downgrade on Oct. 8 was investors' perceptions rather than business fundamentals:
Bottom line: I see silverlining......
Here are the excerpts from SSB's downgrade by C. Westmont:
(BTW, same lines were used on PMCS's downgrade)
We have lowered our rating on customer inventory concerns.
After the close of the market on October 7, Hi/fn, Inc. (HIFN, not rated) made it known that Wall Street should substantially lower numbers for the December quarter based on order push-outs from its two largest customers, Quantum (roughly 45% of sales) and Lucent/Ascend (roughly 35% of sales). Hi/fn is a sole-source supplier of chips that are used in Ascend's MAX TNT remote access switching equipment. While Hi/fn stated that end-market demand for Ascend was still growing, the customer had accumulated too much inventory of Hi/fn's devices and plans to deplete inventories in the December quarter. This is an issue for Vitesse since Lucent is Vitesse's largest customer (roughly 20% of sales). Vitesse predominately supplies chips for optical networking, and is therefore not likely entangled in the MAX-TNT (an access switch with copper, not optical, interfaces) inventory problem. Nevertheless, the problem for Hi/fn will likely raise questions about inventory management practices in general at Lucent. In fact, inventory turns at Lucent have deteriorated over the last several quarters, from 5.5x in September 1998 to 3.7x in June 1999.
Fundamentals remain sound.
While the company is in its quiet period, we expect Vitesse Semiconductor will meet or beat earnings expectations for the September quarter and provide a positive outlook for December, as well as for 2000. In fact, we believe business with Lucent, which had been a problem for Vitesse in the June quarter, is currently on the upswing.
Investors' perceptions are key.
While we remain comfortable with our financial model, investor conviction in estimates is likely to be affected as concerns about excess customer inventories come to the fore. We have been wary of inventories for the last several months and believe longer delivery lead times and generalized supply concerns may lead to a stockpiling mentality by customers. Given our more general concerns, it would be difficult for us to strongly defend the stock at this time and price. One of the disturbing comments made by Hi/fn was that Ascend had switched from expediting orders to canceling orders almost overnight. This type of sudden switch is not atypical in an inventory stockpiling/depletion cycle, and can keep investors skeptical even after seeing positive earnings results in print. Vitesse is very well-regarded by customers and competitors alike, and we view it as one of the core long-term holdings in our franchise. Our bias would be to UPGRADE VTSS AGAIN if it gets oversold or as the inventory situation becomes clearer. |
