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Technology Stocks : LSI Corporation -- Ignore unavailable to you. Want to Upgrade?

To: michael97123 who wrote (22505)	7/27/2000 9:33:46 AM
From: michael97123	Respond to of 25814

Thursday July 27, 9:00 am Eastern Time Individual Investor Semiconductor: LSI Logic: Does it Make Sense to Buy? Research Analyst: Will Frankenhoff (07/27/00) Shares of LSI Logic (NYSE: LSI - news) took another pounding on Wednesday, dropping $7.81 or more than 19%, to $32.69 as investors reacted negatively to the company's second quarter results. A few brokerages downgraded the shares, including Salomon Smith Barney, which reduced its rating to ``neutral'' from ``buy'' and cut its price target to $40 from $70. LSI Logic, the number one supplier of application specific integrated circuits (ASICs) (Translation: custom-made chips), reported revenue of $644 million, up 29% over the prior year's quarter while earnings came in at $0.29 (excluding one-time items), up 190% over last year's quarter. On the surface these results look pretty solid, huh? But, in reality this marks the second consecutive quarter in which LSI has disappointed analysts and investors on both the top and bottom line. Revenue growth, while impressive on a year-over-year basis, fell short of consensus analysts' estimates of $674 million and represented sequential growth of 4.7%, well below previous management guidance of 8%-10% sequential growth. The company attributed part of this shortfall to the fact that $20 million worth of revenue in the quarter slipped into the third quarter due to component shortages as well as the implementation of a new enterprise resource planning (ERP) system. Believe it or not, the company claims that someone punched in an order incorrectly and $10 million worth of chips slated to ship in the quarter will now ship on the first day of the third quarter. Wacky, huh? As it turns out, even if this $20 million were recorded in the quarter, the company would still have come in below estimates. Similarly, earnings of $0.29 per share, while in-line with analysts' estimates, fell short of various ``whisper'' numbers that ranged as high as $0.48 per share. In the current market environment, a company failing to beat estimates by a decent margin is asking to get creamed and LSI certainly has been taking a beating. Including Wednesday's pummeling, shares of LSI Logic have fallen over $20, or 38%, in the past week and are 63% off their 52-week high of $90.38 reached on March 10. Given this decline, LSI shares trade at 18 times fiscal 2001 estimates of $1.78 per share despite projections of earnings growth of 125% in fiscal 2000 and a further 41% in fiscal 2001. This disparity between the stock's current valuation and its projected growth rate is one of the reasons that we'd recommend LSI Logic as a good trading play for investors with a six month horizon, despite the company's recent underperformance. Simply put, at these levels LSI is trading not only at a substantial discount to its growth rate but is also trading at a 57% discount to its five-year average p/e of 42. While we realize that sentiment has turned somewhat negative towards the sector as a whole due to concerns that the semiconductor stocks have peaked, we believe that LSI has some gas left in its tank and that the forthcoming quarters could hold some upside surprises. Why? There are a number of reasons. The first is that demand for the company's ASICs continues to greatly outstrip its supply and that the company is moving to increase the capacity at its Gresham fabrication plant from 3,000 wafers a week now to 4,500 per week by the first quarter of 2001. While this ramp up will temporarily damp gross margin expansion, the company stated that it's comfortable with expectations of gross margins of 44% for the year, up from 42.9% in the current quarter. Similarly, the company expects that operating margins should reach the 20% level in the fourth quarter (up from 17.8% currently). Another reason for near term bullishness is the fact that LSI has moved to expand its supplier base so as not to experience the component shortage that crimped results in the quarter. While not offering specifics, the company stated that it had added several additional suppliers and that it was building an inventory cushion in order to alleviate any future shortages. Finally, it should be noted that sales to the communications market (products carry higher margins) are growing faster than expected and LSI Logic now expects this segment to contribute 50% of total revenue by the end of the current quarter, a quarter ahead of schedule. In the fourth quarter the company believes that communication product revenue could reach 65% of total sales. Bottom Line: We know that investors are wary of technology stocks at the present time and the recent weakness in the Philadelphia Semiconductor Index (SOX) shows that they are especially concerned that the industry might have peaked. We believe, however, that LSI's cheap valuation and its potential for upside surprises over the next two quarters make it a risk worth taking and advise investors looking for a quick pop to get in now.