Prudential raises price target to $300. CSFB raises to $250. Here's Prudential's report:
- PMC-Sierra announced the acquisition of AANetcom and Extreme Packet Devices,
two privately held fabless semiconductor companies. We believe the combination
of these companies will give PMC-Sierra more communications system expertise
than any other communications IC company we know of.
- Both acquisitions are very complimentary to the company?s current product
offering and should significantly increase the potential revenue per system.
As was the case with the acquisition of Abrizio, these companies should, in
our view, contribute significant revenue in the next 18 to 24 months.
- The additional products and approximately 100 development personnel acquired
should further the company?s lead in the area of semiconductors for broadband
communications infrastructure equipment.
- Reiterating our Strong Buy for PMC-Sierra and raising our 12-month price
target to $300 from $125. We believe that PMC-Sierra is the dominate pure-play
supplier of ICs for communications infrastructure equipment and should trade
at a premium to its peers.
Acquisitions Improve What We Already Viewed As A Premier Position
For quite some time, we have expressed our opinion that PMC-Sierra will be a
primary beneficiary of the race to build out the Internet infrastructure. We
believe that Friday?s acquisitions of AANetcom and Extreme Packet Devices
widens the company?s lead. These acquisitions significantly increase the
company?s potential revenue per system and add approximately 100 additional
development personnel to what we believe was already the largest development
team focused solely on semiconductors for broadband infrastructure equipment.
We expect that these acquisitions should start to significantly contribute
revenue by the end of 2001. Stock issued for the acquisitions could be
slightly dilutive in the short term, but we also believe the company?s current
business is very robust and may offset any such dilution. We are leaving our
model unchanged until further details of the acquisitions become available
over the next couple weeks.
We are reiterating our Strong Buy for PMCS and raising our 12-month target
price to $300 from $125. Our target is based upon a 300 multiple to our
calendar 2001 EPS estimate of $1.00. Currently, our select list of comparable
communications IC companies is trading at an average of 276 times calendar
2000 earnings expectations. We believe that PMC-Sierra should trade at an
above average multiple because of its superior competitive position. We
believe that a multiple of 300 represents an appropriate premium for PMCS.
Acquisition of AANetcom
On Friday, PMC-Sierra announced the acquisition of AANetcom for 4.8 million
shares. The acquisition is expected to be accounted for as a pooling of
interest and has already been approved by AANetcom shareholders. We expect the
acquisition to close before the end of the March 2000 quarter. AANetcom
currently has 50 employees, the vast majority of which are engineers
specializing in high-speed circuit design using standard CMOS process
technology. The company?s current product offering, a CMOS octal backplane
transceiver (OctalPHY) was introduced within the last month and is reported to
have been designed into over ten systems. Customers can use the OctalPHY to
significantly improve the performance of communications systems by increasing
the speed of the system backplane, or the communications between circuit cards
within the system. We believe this new product offering is very complimentary
to PMC-Sierra?s current offering and should increase the company?s potential
dollar content in communications equipment such as gigabit and terabit
switches and routers and optical networking switches. Based upon design cycles
for such equipment, we expect PMC-Sierra to experience significant revenue
from this acquisition in the first half of 2001.
Acquisition of Extreme Packet Devices
On Friday, PMC-Sierra announced the acquisition of Extreme Packet Devices
(EPD), for shares with a value of approximately $415 million. The acquisition
is intended to be accounted for as a pooling of interest and is expected to
close in either the March or June 2000 quarter. EPD currently has 60
employees, the vast majority of which are technical staff. The team?s core has
extensive communications system knowledge as a result of their backgrounds at
companies such Nortel Networks and Newbridge Networks. It is this system
knowledge that has allowed the company to define a three-chip set to manage
traffic in IP and ATM switches at data rates of OC48 and OC192. Data traffic
management will be critical in the next generation of Internet infrastructure
equipment to assure prioritization of packets which are time critical such as
voice and video. The company expects the chipset to be available in the summer
time frame and has indicated that several companies have already begun to
design cards around the product. Based upon system design cycles we expect
that the company will begin to realize significant revenue from this
acquisition in 2002. We believe this product offering is very complimentary to
PMC-Sierra?s current offering and should significantly increase the company?s
available market. |
