October 15, 2008 - PMC Sierra Inc. (PMCS-NASDAQ) engages in the design, development, marketing, and support of communications semiconductors, storage semiconductors, and microprocessors for the communications service provider, storage, and enterprise markets. Its products include line interface units that transmit and receive signals over a physical medium, such as wire, cable, or fiber; framers and mappers, which convert the data into a format for transmission in the network before the data is sent to the next destination; packet and cell processors that examine the contents of cells or packets, and perform various management and reporting functions; and controllers based on Fibre Channel, Serial Attached SCSI, and Serial ATA, which enable technologies for building network-attached storage system architectures.

You have to look at a stock that hit an all-time high of $255.50 in 2000, then cratered to $2.70 in 2002 (prices adjusted for a 2 for 1 split in 2000). Now it's selling for $5.53 (with $1.46 a share in cash), down from $7.50 only a week ago. Can it rebound and gain traction or is it just another victim of the economic downturn, having already been busted by the dot com disaster of 2000?

Here's what we know. There's a third quarter conference call today, October 16, after the market's close and release of the company's third quarter earnings. They'll be available on the Web site:www.pmc-sierra.com. The conference call webcast will be accessible under the Financial Events and Calendar section at http://investor.pmc-sierra.com/. To listen to the conference call live by telephone, dial (416) 640-5925 approximately ten minutes before the start time.

Analysts expect earnings per share (eps) of 12 cents for the third quarter, 33% better than last year's same quarter at 9 cents. Next quarter they see 12 cents as well, again, up from 9 cents in the same quarter last year. For the year, ending in December, look for 48 cents (consensus estimate from 11 analysts), up more than double last year's total of 23 cents a share and next year, expect 52 cents eps. On a forward P/E basis, the stock is selling at 10 times earnings.

In the past, earnings have been erratic, at best. after hitting $1.05 in 2000, there were 3 years of red ink, showing a negative 37 cents in 2001, followed by negative 27 cents, then negative 3 cents in 2003. In 2004, they were positive, 19 cents, followed by 20 cents in 2005. 2006 saw a dip to 13 cents. Last year they hit 7 cents (not a good trend). But this year, things look better at 48 cents and maybe 52 cents in 2009 if analysts' projections are right.

Some reasons for the optimisim: cost cutting is a priority at PMC Sierra. Better demand across most of PMC's product line is increasing revenues, raising operating and profit margins. In particular, the fiber to the home products are selling well in Asia with analysts seeing continued demand over the next several quarters. More resources will be invested in the company's wireline businesses as demand rises in this sector, a more profitable one than most. New products are coming for the Enterprise Storage and Communications markets.

Investors should like the large cash position PMC has with $322.27 million in the bank ($1.45 a share). While the company only carries a Financial rating of C++ in Value Line, with this much available cash, PMC should be able to suffer through the slings and arrows of the upcoming economic slowdown.

More numbers: Market Cap is $1.2 billion. Trailing P/E is 11.39 while Forward P/E is 10.3. Price to Sales is 2.6 with Price to Book at 1.8. Return on Equity was 15.85% for the last 12 months. Debt to Equity is .174. Current Ratio is 2.825. Book Value per share is $3.30. There are 221 million shares outstanding. There is no dividend.

Make no mistake: PMC Sierra is subject to the same adversity every company will face as all economies slow. But with a large cash position, new products, and strong demand in several sectors, the company has a good chance of delivering quality earnings. Of course, if there's an economic catastrophe where every economy in the world implodes, then this stock, like all others, will simply go lower.

Company Web site: www.pmcsierra.com

 Ted Allrich