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Communications-Chip Makers Get Rare Upgrade

Vitesse, Applied Micro and PMC-Sierra all rise on a more hopeful outlook.

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Applied Micro

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popped Wednesday following Lehman's move to upgrade the communications-chip makers to equal weight from the underweight rating they've been tagged with since October 2000.

In late afternoon trading, Vitesse jumped 63 cents, or 12.5%, to $5.69. PMC-Sierra rose 77 cents, or 6.2%, to $13.17. Applied Micro climbed 8 cents, or 1.3%, to $6.30.

The stocks gained even though Lehman Brothers analyst Arnab Chanda warns that "current valuation is high" and recommends investors "look for an entry point on a market pulback."

On the fundamental side, he says the telecom business at all three companies is poised for an upturn: Inventories among their telecom-equipment customers are the lowest they've been in three years, and end markets have stopped getting worse. "We believe that the vast majority of inventory corrections and capex reductions are behind us," he writes, adding, "As the telecom sector bottoms the telco

integrated circuit companies will tend to outperform their peers."

Lehman has recently done banking for Vitesse and PMC-Sierra.

In related research notes, Chanda says that Applied, helped along by its continuing investments in R&D, is likely to benefit most of the three from the customer trend to switch from custom-designed chips known as ASICs to standardized silicon known as ASSPs. "Compared with competitors AMCC maintained a larger engineering team and should see a stronger growth opportunity in the ASIC-ASSP migration," he writes.

Chanda adds that Vitesse is likely to see near-term growth from wins in storage and new products for metro and enterprise markets, but the company needs to stay focused on holding down costs. He notes PMC-Sierra is believed to be in discussions to end the lease of a large building in Santa Clara, which could cause cash outflows; while it's generally done better than competitors on the cost-cutting side, PMC-Sierra will need to do more to jack up earnings growth above the level of sales growth.