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Tuesday, August 15, 2006

Most Actives: Marvell VS. Broadcom

Stock tickers: BRCM, MRVL, CSCO, INTC, RBAK, QCOM, TXN, FSL, SNDK, PMCS


It is always interesting what happens on down the food chain when you see one behemoth like Cisco (CSCO) show earnings and forecasts that are much better than what is really just a dull sector if you refer to everyone else. Cisco created rallies in Juniper (JNPR), and SanDisk's (SNDK) earnings blowout and projections lift it and related flash memory producers. Then Redback (RBAK) ran huge as it claims options are not a material problem there. So maybe tech isn't dull in the entirety.

Last week was the start of an FCC auction (please email results and thoughts to us if you have any insight on that auction) set to raise something like $14 Billion or more in spectrum sales for more powerful wireless broadband (WiMax, 3G, 4G) for service providers to offer. So this all trickles down to companies such as Marvell (MRVL) and Broadcom (BRCM).

Marvell and Broadcom have certainly had to deal with issues and their stock prices prove it. If you compare the two, it becomes obvious why Broadcom has been winning.

BRCM $27.35 (+$1.24, or +4.75%): Broadcom is almost cut in half from its $50.00 highs earlier this year. It now has a market cap of $14.3+ Billion, so it was worth roughly $28 Billion at the peak. Broadcome is up just under 20% from its $21.98 lows in the last 52-weeks. Broadcom trades at 20.1 times earnings on a projected 2006 street estimate ($1.36 est.) and Broadcom is expected to post $3.7 Billion in fiscal 2006 revenues.

MRVL $18.59 (+$1.10, or +6.28%): Marvell is also down essentially half from its $36.84 high this year. With a current market cap of $10.82 Billion that implies roughly a $21.5 Billion market cap at its peak. Marvell is also up about 11% off of its recent 52-week lows of $16.70. For its Fiscal Year Jan-2007 Marvell trades at 19.5 times projected earnings ($0.95 est.) and it is expected to post $2.4 Billion in annual revenues.

What is interesting is why these two companies are not more equally paired. They are not a mile apart, but they are apart nonetheless. It really looks like the street is still thinking that Marvell's purchase of Intel's (INTC) phone chip unit for $600 Million may have been a defensive move or a prideful move more than a real strategic one that will add to earnings in a spooked market. Marvell is essentially fabless so it has to rely on Intel for production for 2 years. This deal will close in November and the company will assume the vast majority of the 1,400 related employees. These chips power smart phones and PDA, which are said to power Palm Treo's, R-I-M Blackberries, and even Motorola Q phones. Unfortunately, it wasn't profitable for Intel since the unit was losing money, and this is expected to bite into Marvell's 2007 earnings. This acquisition is also going to suck up quite a bit of the nearly $1 Billion Marvell has amassed in cash and short-term securities.

In this arena both companies compete against Texas Instruments (TXN), Freescale (FSL), Qualcomm (QCOM) and PMC-Sierra (PMCS). While the comparisons above look very similar, it looks like the investors are still thinking that BRCM may have a bit more safety and value looking ahead after the dust settles. Marvell also has its earnings coming this Thursday, August 17. It is odd that the street is bidding that up more with the implied event risk since BRCM already reported earnings.

It is hard to know how the options probes are going at each since Broadcom has said it has to delay filing its quarterly report and that it will have to restate earnings back to 2000. We'll know how Marvell has faired through the options issue in about 48 hours.

Jon C. Ogg
August 15, 2006
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