Seeking Alpha: PMC-Sierra Leveraged To High-End Product Cycles

These aren't the best of times for the storage and carrier hardware industries, but PMC-Sierra (NASDAQ:PMCS) is looking to leverage new product introductions, the move toward software-defined networking in the data center, and a capex shift toward optical transport networking (or OTN) equipment to drive a meaningful upturn in revenue and further leverage in margins.

Mid-to-high single-digit revenue growth and low double-digit FCF growth can support today's stock price and the company's margins do argue for a higher revenue multiple than today's level. It's also worth noting that acquisition activity has picked up in the chip space and PMC-Sierra would fit in with multiple suitors that have the wherewithal to make a deal. I don't see a large discount to fair value here, but the company has a legitimate opportunity to gain share in multiple markets and the company is still of a size where a few extra points of market share can drive meaningful extra value.

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PMC-Sierra Leveraged To High-End Product Cycles

Seeking Alpha: Should Investors Buy PMC-Sierra Ahead Of Big Product Ramps?

Shares of storage and networking semiconductor company PMC-Sierra (PMCS) have done reasonably well since I last wrote about the company in October. Up around 20%, the company has lagged acquisition-assisted LSI (LSI), but matched Broadcom (BRCM) and outperformed Applied Micro (AMCC). Analysts, though, are a little worse than lukewarm on the shares, with four holds and two underperforms at present.

In reading the sell-side research, it seems like analysts are concerned about going positive on PMC-Sierra ahead of meaningful ramps in PCIe flash controllers, 12G SAS, and OTN. While I find it odd that the normally overly-bullish sell-side is being cautious, investors don't seem to have the same issue. With the run in the shares over the past six months, PMC-Sierra's price seems more than fair relative to its long-term cash flow-based value and likewise quite reasonable relative to operating margins.

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Should Investors Buy PMC-Sierra Ahead Of Big Product Ramps?

Seeking Alpha: Is PMC Sierra The Way To Play Storage And Carrier Spending?

On the surface at least, PMC-Sierra (PMCS) is in some of the right markets. Enterprise storage continues to score well in various CIO surveys of spending priorities, while carriers are stepping up their plans for metro/access network spending and wireless backhaul. Not only are the end-markets looking better in many cases, but PMC-Sierra also enjoys good share and growth prospects from WinPath and 6G/12G transitions.

It takes more than a good top-level story to drive a good stock performance, though, and I'm not completely sold on the value proposition for PMC-Sierra. I do believe storage and carrier spending will accelerate, and the possibility certainly remains that the company can outperform current expectations for 2014 and beyond. While these shares could move as much as 20% if PMC-Sierra's 2014 outlook doesn't worsen and the Street goes back to historical multiples for the company's comp group, the core DCF valuation doesn't suggest quite as much upside.

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Is PMC Sierra The Way To Play Storage And Carrier Spending?