Chips Are Down for Texas Instruments

S&P downgraded the shares, noting the firm's weak margins. Also: opinions on EMC and Vitesse

Texas Instruments (TXN ): Downgrade to 2 STARS (avoid) from 3 STARS (hold)

Analyst: Thomas Smith

The chipmaker posted pro forma Q4 EPS of $0.31 (Generally Accepted Accounting Principles basis was $0.37) vs. $0.25 ($0.25). The company's EPS fell below the Street's estimates of $0.33. Revenues rose 15% year over year, but fell 3% quarter over quarter. Margins narrowed for the chipmaker, which was slapped more rudely than expected by weak electronics end-markets and customers inventory buildup. Texas Instruments sees Q1 revenue down 10% sequentially and is cutting its 2001 EPS estimate to $1.10 from $1.55. S&P expects Texas Instruments to dip, but not far, given the potential for a stronger U.S. economy in late 2001. Also, while there is a strategic emphasis on digital signal processing chips, analog chips should bear more fruit in 2002.

EMC Corp. (EMC ): Reiterates 5 STARS (buy)

Analyst: Jim Corridore

The company posted Q4 EPS of $0.25 vs. $0.17, beating the Street's consensus by two cents. Revenue growth accelerated again, with total revenues rising 40%. The company's information storage revenues rose 50%, while software revenues climbed 72%. Revenues from networked storage (both SAN and NAS) grew over 250% to $770 million. EMC gained market share in nearly every segment it competes in. Gross margins widened again to 59.2% from 55.1%, and operating margins widened to 27.2% vs. 24.2%. EMC had an excellent quarter, all the more impressive in light of worries about an information technology slowdown.

Vitesse Semiconductor (VTSS ): Upgrade to 5 STARS (buy) from 3 STARS (hold)

Analyst: Thomas Smith

The chipmaker posted pro forma Q1 fiscal 2001 (September) EPS $0.25 vs. $0.11, a penny above consensus. Revenue climbed 85%, up 19.6% quarter over quarter. The company expects a sequential revenue gain for the current quarter in the 10-15% range. Sales should pick up as the year progresses and the economy mends. S&P is revising its estimates to $1.18 from $1.15 in fiscal 2001; and to $1.70 from $1.60 in fiscal 2002. The company has a relatively high PE of 52 times S&P's $1.30 calendar 2001 estimate. However, Vitesse likely will deliver results in line with its 40% long-term growth rate. The p-e/growth ratio is at 1.3, which is attractive for the high-flying chipmaker that serves telecom and datacom markets.

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