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Technology Stocks : LSI Corporation

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To: Grand Poobah who wrote (18972)	6/20/1999 1:01:00 AM
From: shane forbes	Read Replies (2) of 25814

GP: Re:Any thoughts as to how long this will last? Will the upturn be as good and long as the downturn was bad? I think the market is hoping for that. But the prices of many of the semis are already discounting a sizable chunk of the potential gains. The problem with high valuations is that the stocks become more speculative in nature - the bottom is far below and so there isn't much protection. There are exceptions however and LSI may be one of them. In its typical fashion it is marching to a drummer with a slightly different beat. Since I suspect that the Symbios assets is a better set of assets than the 'old LSI' assets and the merger with LSI gives Symbios a better market, the standalone Symbios valuation affords a lot of downside protection. As well, the 'old LSI' assets are still not nearly as productive as they could be and assuming they become productive soon here is a reason for considerable appreciation. Now how long will it last? First note that the 12% from the SIA looks low. They were too optimistic in the downturn maybe they're too pessimistic now? Certainly the sector share prices hint at much larger growth this year (I think). The next issue is if they are hinting at much larger growth for this year, how much is there for next year? Not sure. My feeling is that the road will be a long profitable one but there will be some good sized bumps along the way. In particular I suspect there is a strong inventory build going on right now. If this inventory is not consumed then the earnings estimates going out are high and the stock prices will correct to reflect that. I suspect there will be a hiccup in the next few months. Irrational 'blinders on' exuberance as reflected in many of the sector prices is usually wrong. Having said that I do believe that nevertheless this will be a long road. Among the interesting points - (1) consolidating manufacturing (that is getting the Taiwan companies to do the manufacturing) means you have lesser capital at risk and you have flexibility; (2) communications and the internet - we're still very early in the game here and this is a strong growth market as opposed to a cyclical nightmare; (3) these chips are also non-commodities for the most part and reflect a lot of IP and so are not vulnerable to large price swings; (4) storage - again related to the internet is another good market; (5) the total lack of investment in PP&E during 1998 - for example TSM is scrambling to acquire capacity now etc. For LSI, note that last year was the year of big cap exp. In theory this year should be the year of large generation of free cash flow. Cash generation is a good thing! It means you have not screwed up. So in sum, I think the road will be long, I think we may be in for a hiccup over the next few months because the stocks are generally too rich and there may be an inventory build going on that could backfire, 'old LSI' assets are still a story that needs to execute (as opposed to 'being executed'!). Nice to hear from you!

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