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Technology Stocks : Vitesse Semiconductor -- Ignore unavailable to you. Want to Upgrade?

To: taxman who wrote (3310)	2/4/2000 11:09:00 PM
From: A. Edwards	Read Replies (2) \| Respond to of 4710

VTSS: NEGATIVE PRESSURE UNWARRANTED: WE THINK THE STOCK IS A BARGAIN Prudential Equity Research February 4, 2000 Analysts: Hans C. Mosesmann (650) 320-1631 Prior: John F. Barton (212) 778-1440 - Vitesse's stock is currently under pressure. We understand that a sell-side anaylst commented that Vitesse could significantly fall short of the expected 10% sequential growth in revenue. - We believe Vitesse will deliver the quarter with sequential growth of approximatley 10%. - We believe Vitesse stock is a bargain at current prices. It is currently trading at 45 times calendar 2001 estimated earnings, its comparables are trading at 124 times 2001 estimated earnings. We understand that comments have been made today by a sell-side analyst stating that Vitesse's revenue for the March 2000 quarter could fall short of management's guidance. Primary focus was apparently on lower than expected sales to Lucent and the loss of sockets in Lucent's WaveStar program. Our View: We expect Vitesse to deliever the 10% sequential growth overall and at least 8% sequential growth in sales to Lucent. Additionally, we believe that Vitesse's stock is a bargain; it is currently trading at a significant discount to its peers. The March Quarter Is On Track Based upon our industry contacts and conversations with Vitesse management we are very comfortable that the company will deliver the March 2000 quarter as committed. The actual ramp of the OC192 WaveStar program at Lucent is currently an unknown to everyone including potentially Lucent (reference comments made by Lucent management in their explanation of the December 1999 quarter shortfall), we believe. Vitesse does not need a significant ramp of the OC192 project to deliver sequential growth at this top account. If the project does ramp significantly, sequential growth could exceed our 8% estimate. The OC192 semiconductor space has seen the addition of new competitors and as a result it is unreasonable to expect Vitesse to win every socket in this area. We expect competitors to win some sockets, but Vitesse is also winning sockets in the strong holds of their competitors. The best example of this is the company's success at Nortel, where we believe the company is gaining market share in the OC192 area. Vitesse: A Solutions Provider - Not A Process Oriented Company Concerns about the effect on Vitesse's competitive position as a result of future developments in process technology have also been cited. We believe Vitesse is a premier supplier of communications solutions as opposed to just a company with extensive knowledge of GaAs process technology. We expect Vitesse to leverage the optimal process technology to deliver future communication solutions. Our research indicates that Vitesse is currently evaluating or developing products in SiGe, GaAs, InP, and CMOS Silicon processes. By year end, the fiber market should start to concentrate on OC768 (40 Gbps). We believe this will require a major technology shift for players and that the preferred technology will most likely be indium phosphide (InP). We believe Vitesse could have an edge here relative to silicon-only suppliers as a result of its extensive experience in compound semiconductors. Anyway We Slice The Numbers, We Think Vitesse Stock Is a Bargain. Our list of communication semiconductor comparable is currently trading at 124 times 2001 consensus earnings estimates. If we remove the most richly valued comparables in an effort to be overly conservative we can bring the average multiple down to 92. Using this conservative multiple of 92 and Vitesse's consensus earnings estimated of $1.00 for 2001, this would imply a valuation of $92. This sure makes Vitesse look cheap at the current price of $45. If we make the absurd assumption that sales to Lucent (estimated to be 20% of total sales) go to zero and that results in a 20% decrease in earnings it would imply 2001 earnings of $0.80. Using the 92 multiple and the pontificated $0.80 earnings number we arrive at a valuation of $74. Vitesse still looks very cheap at the current price of $45. In our opinion Vitesse's stock is a bargain at current prices.