A trio of communication stocks jumped Friday after Juniper's (JNPR:Nasdaq) strong earnings report showed increasing demand among the networking equipment makers that buy their silicon.
Applied Micro Circuits (AMCC:Nasdaq) rose $1.07, or 13.5%, to $8.98, while PMC-Sierra (PMCS:Nasdaq) climbed $1.92 cents, or 8.8%, to $23.80 and Vitesse (VTSS:Nasdaq) rose 95 cents, or 12.7%, to $8.41. Each ended the session at a 52-week high.
Thursday's upbeat commentary from Juniper jibes with increasing optimism on Wall Street that telecom providers are finally growing more willing to increase their capital spending. Last week SBC (SBC:NYSE) said that depending on how the year goes, it could end up spending an additional $500 million in 2004 on top of the $5 billion guidance it first outlined in November.
The increased spending that starts with telecom service providers trickles down to telecom gear providers like Juniper and Cisco (CSCO:Nasdaq) and, finally, to the communications chipmakers that supply their silicon.
Friday morning, Merrill Lynch analyst Srini Pajjuri upgraded PMC Sierra from sell to neutral, saying the company is likely to post upside to his current earnings estimate of 2 cents per share for the December quarter. Improving telecom spending and inventory replenishment should offer further upside to estimates throughout the rest of 2004, he added.
Pajjuri said he doesn't see any negative fundamental catalysts for the stock in the near term, but noted that its already-rich valuation suggests it has little room to appreciate. Merrill hasn't done recent investment banking for PMCS.
On Thursday, Lehman Brothers analyst Arnab Chanda upgraded AMCC, Vitesse and PMC-Sierra to overweight from market perform in light of the improving outlook. He suggested the three should continue to benefit from an industry shift as communications equipment outfits increasingly buy chips from outside companies, rather than undertaking the expensive process of designing the silicon themselves.
Chanda said the three upgraded names have already begun to see their operating margins expand. With inventories at historic lows and visibility improving in the telecom industry, he said the chipmakers are positioned to beat Wall Street expectations, fueling further stock price appreciation.
The analyst believes Vitesse, which reports earnings Jan. 22, could possibly report break-even results in the quarter, helped by upside from the telecom business. Still, his formal estimate is Vitesse will show a penny loss in the quarter, same as the consensus forecast. Chanda also says AMCC could manage to break even as early as the March quarter vs. the company's prediction of June.
Despite the apparent upside on the horizon, Chanda also acknowledged the communication chipmaker stocks are not cheap. "We believe that the stocks have rallied strongly to anticipate a recovery and are trading currently at high valuations," he wrote, while nevertheless arguing the potential for strong revenue and EPS outperformance still qualifies them as solid investments.
Still, since he upgraded the group to an equal rating from an underweight in June 2003, PMC-Sierra has gained 86%, AMCC rose 19% and Vitesse climbed 35%. Lehman hasn't done recent investment banking for any of the three.
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