PMCS: Coverage initiated:Price target 270
JP Morgan - PMC-Sierra, an “arms merchant” in the communications components market, in our view, takes an aggressive approach to internal development and acquisitions and differentiates itself by selling a broad line of chipset solutions based solely on silicon technology. This lower cost, "mass market" silicon-only approach allows the company to be fabless, focusing its internal resources on chip designs (PMC-Sierra’s core competency) and high volume production in an effort to capture the lion’s share over the lifetime of the networking devices it sells into. Through its acquisitions and internal R&D, we believe the company has created one of the most complete portfolios of high-speed communications chipsets in the industry.
The company's more than 100 customers include both established networking system vendors, as well as emerging companies. Customers such as Cisco (CSCO/$58.25/Buy) (and Cerent), Nortel, Ericsson (ERIYC/$14.00/Long-Term Buy), Lucent (LU/$23.44/Long-Term Buy), and Alcatel (ALA/$63.50/Buy) are a few of the blue-chip companies utilizing PMC-Sierra’s chipset solutions. An ever-increasing number of design wins with those and other networking system vendors (419 in the September quarter, almost 4,000 since first quarter 1998, and 2,444 pending) should present opportunities for results to exceed our current projections.
We arrive at a 12-month target price of $270 for PMCS by applying a price/revenue multiple of 28 to our 2002 revenue estimate of $1.77 billion. Based upon the company’s projected revenue growth (134.6% and 76.0% in 2000 and 2001), margins (gross and operating are some of the highest in the space), broad product portfolio, and diverse customer base, we believe PMCS deserves to trade above the average of its competitors. Additionally, we forecast EPS at $1.03 for 2000 and a conservative $1.67 for 2001, for 181.8% and 62.8% respective annual gains. |
