Investors in communications chip company
figured out Thursday what
Walter "Gib" Gibson could've told them more than 15 years ago --
the sure thing doesn't exist.
owned up Thursday to the disastrous month that January has been for the one-time do-no-wrong
portfolio manager darling. Instead of being insulated from the macroeconomic and cyclical slowdown affecting the rest of the chip sector, PMC disclosed that it'll actually suffer more than some competitors in the first quarter.
This was too much for PMC shareholders to take. Despite the resilience the stock had shown in the face of the technology washout last spring, confidence had begun ebbing in September. Over a four-month slide, it and many other chipmakers had lost more than 50% of their sticker prices. January started off well, as PMC was caught up in the
rate-cut-induced tech-stock rally. But that quickly was forgotten Thursday as it dropped 30% in after-hours trading after issuing earnings and the warning. The stock headed sharply lower at Friday's open before finishing regular trading for the day down $21.88, or 23%, at $74.
A massive inventory correction and spending slowdown among the telecommunication companies that buy its products, such as
, and a slowdown in overall consumption will push revenue down 26% to 30% this quarter from the fourth quarter. Beyond the first quarter, the company said it had "no visibility," and at the best, if the economy recovers in the year's second half, growth for the year could be 30%.
price-to-earnings ratio of PMC was so dependent on exactly this not happening," explains Rick Billy, an analyst for
. This, Billy explains, was a company that investors had been counting on to double its revenue annually.
From a more-than-100% growth company to a 30% growth company in a day. But oddly enough, the big drop in the stock Friday wasn't enough to lower that P/E ratio because many analysts had trimmed about $1 off expectations for 2001 earnings of $1.70. So the P/E actually climbed to more than 90 from 56, where it stood before the big decline in both the stock price and estimate. The new P/E is below competitor
Applied Micro Circuits
at 132, but far above a PC-chipmaker such as
, trading at 34 times 2001 earnings.
PMC-Sierra sells highly specialized chips that go into networking and communications applications. And it was this focus that some analysts thought could protect it from the kind of pricing declines and cycles that hurt the broader semi market from time to time. As it turns out, its telecommunication customers -- from Cisco to
-- have too much inventory on their hands.
PMC-Sierra executives weren't shy about detailing the inventory issues during their conference call Thursday. In fact, the amount of detail they gave perhaps shows how little detail was in some other recent chip-company conference calls. For example, SG Cowen's Billy said, PMC-Sierra reported that the contract manufacturers (which make the parts for companies like Cisco) had four to six weeks of inventory at the end of December. PMC-Sierra shipped nothing to them in January, and yet contract-manufacturer inventories grew to six to 10 weeks. That's more detail than the other companies, including Applied Micro and
, offered. And in turns out more information may have simply provided more reasons for investors to sell.
"Now that they've given us this information, we have to analyze it. And now that we analyze it, it gives us a picture. ... This is not a bad company. This is a top-tier company. If they are experiencing this kind of problem, others are, too," Billy said.
All the same, investors were more concerned with PMC-Sierra. Applied Micro and Conexant each fell only about 2% Friday. One reason for that may be that PMC-Sierra's particular products are suffering more than those of its competitors.
, for instance, pointed this out in its note. (Robertson Stephens also was one of many Wall Street banks
cutting earnings estimates and lowering ratings Friday.)
Robbie analyst Arun Veerappan, for instance, said PMC-Sierra doesn't offer certain products that are used in the networking business. And, of course, it's those products that have actually been doing better and buoying competitors' outlooks this quarter, while some of the products PMC specializes in have become less of a boost to the bottom line. (Robertson Stephens hasn't done underwriting for PMC-Sierra.)
Still, Veerappan anticipates that PMC-Sierra's growth rate will hit 30% to 50%. But even that's no guarantee.