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Chips fall on downgrade
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November 16, 2000: 2:21 p.m. ET
Merrill Lynch cuts ratings on 7 semiconductors: PMC, Broadcom hit
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NEW YORK (CNNfn) - Chip stocks tumbled Thursday after Merrill Lynch analysts cut their rating on the semiconductor makers, noting the big inventory buildup they faced at some of their biggest customers.
Merrill Lynch's Joe Osha and other analysts cut a slew of stocks in the semiconductor-for-communications sector to near-term "accumulate" from "buy," noting equipment makers' inventories "could be as much as 40 percent higher than historical norms."
That could erode sales for chip suppliers, he noted. Stocks cut include: Applied Micro (AMCC: Research, Estimates) off $8.50, or 12 percent, to $62.50; Broadcom (BRCM: Research, Estimates), down $17.56, or 7.7 percent, to $152.12; Vitesse (VTSS: Research, Estimates), down $3.25, or 4.6 percent, to $67.44; PMC-Sierra (PMCS: Research, Estimates), off $14.38, or 11 percent, to $116.75; Exar (EXAR: Research, Estimates), down $6.75, or 17.6 percent, to $31.62; Transwitch (TXCC: Research, Estimates), down $5.38, or 12 percent, to $39.88 and Conexant (CNXT: Research, Estimates), off $3.88, or 12.2 percent, to $27.88.
"While we believe that our December 2000 quarter estimates are intact, we believe that there is a high probability that the inventory build corrects sometime over the next two quarters," Osha said in a research note.
"We do believe that the communications-IC suppliers are safe from a correction only under a limited set of circumstances: that demand for product continues to accelerate and that component lead-times stay stable or actually increase," said another Merrill Lynch analyst during a conference call.
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In addition, the stocks saw price targets sliced, including AMCC, to $110 a share from $115; BRCM, to $225 a share from $300; PMCS, to $200 a share from $300; TXCC, to $70 a share from $80; VTSS, to $90 a share from $105; EXAR, to $55 a share from $70 and CNXT, to $55 a share from $75.
 "While many of the stocks in this group are already down by 50 percent over the past several weeks, we believe that inventory concerns, coupled with telecom service provider capital spending concerns, will weigh on the group for the next one to two quarters," Osha said.
Overall, chip-related companies suffered in early Thursday trading, with the Philadelphia Stock Exchange's Semiconductor Index (SOXX) declining 23.02 to 691.98.
However, Osha said that his comments regarding "the near-term potential for stock price movements in the wireline communications IC sector should not be extrapolated to the semiconductor sector at large. We have noted a marked divergence in developments in the three main end markets for semiconductors, specifically PCs, wireless and wireline." 
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