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Monday, July 24, 2006

Can PMC-Sierra Be Resurrected?—Widely Traded 48 Hour Clock

Stocks: (PMCS)

PMC-Sierra’s shares have not been this low since early 2003. Investors in the stock have lost an astonishing 60% of their money as the stock has fallen from $13.77 in April to $5.41. What a difference a quarter makes.

Investors can certainly make the case that the shares in the telecom chipmaker are now undervalued, perhaps by a wide margin.

The company has made two significant acquisitions by buying storage chip companies Passave and Avago. According to, Morgan Stanley is concerned that Passave is underperforming its revenue targets. Both Morgan Stanley and Standard & Poor’s lowered earnings estimates on margin concerns.

But, does that justify a decline of over $1 billion in market cap for a company that did nearly $300 million in sales last year?

For the quarter ending July 2, 2006, revenue went up 66% to $118.8 million compared to the same quarter last year. Compared to the immediately previous quarter, sales rose 35%.

In the comparable 2005 quarter, the company lost $359,000. In the most recent quarter, the loss ballooned to $23.4 million. But, that number includes a write-off of in-process R&D and an amortization of purchased intangibles of nearly $10 million. The company shows non-GAAP financials taking out these items and stock based compensation. On that basis, the company had non-GAAP net income of $19.4 million in the quarter just reported compared to $7.2 million a year ago.

The company’s business of making chips for broadband networks that enable the efficient transmission of traffic like voice and data is still a good one.

Wall Street’s concerns about margins may be justified, but net cash used in operating activities was only a negative $2.3 million, and that odds seem quite good that this figure will go positive in future quarter.

It is too early to count the company out, and with the stock down this much, PMC Sierra does not have to do a great deal to show that the value of its shares it too low. That may just be a quarter away.

Douglas A. McIntyre can be reached at He does not own securities in any of the companies that he writes about.

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