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

To: Jock Hutchinson who wrote (17919)	4/11/1999 12:24:00 PM
From: Jock Hutchinson	Respond to of 25814

As a follow-up, Let's evaluate LSI's current market components to arrive at a proper price to sales ratio. Currently, it has about 74% of its revenues in high end chips, 17% in low end, 8% in storage, and let's say 1% in design. The most analogous companies that come to mind are TXN in the high end market; MU in the low end market (although this is not that analogous since MU is DRAM, and LSI is gate array); Seagate in storage; and Cadence in design. Now let's compare the charts for the five different companies: techstocks.com The price to sales ratios of TXN, MU, SEG, and CDN are 5.6, 3.7, 1.0, and 3.6 respectively. LSI's current price to sales is 3.0 Assigning LSI's current percentage of sales to the price to sales of the other four companies in the same respective fields yields a "correct" price to sales valuation of 4.9 for LSI. This is derived by adding the sums of (5.6 [TXN price to sales ratio] x .74 [LSI's % of revenue in TXN's field])+ (3.7 [Mu's price to sales ratio] x .17 [LSI's % of revenue in MU's field]) + (1.0 [Seagate's price to sales ratio] x .08 [LSI's % revenue in Seagate's field])+ (3.6 [Cadence's price to sales ratio] x .01 [LSI's % of revenue in Cadence's field])=4.889. If this sales ratio were applied, LSI would have a current market price of $62. But let's discount the gate array to a 1:1 price to sales valuation, and one still arrives at a price to sales ratio of 4.43, which would leave LSI with a current market price of $56. OK, LSI is not TXN so let's dilute TXN's valuation by 25% and then apply it to LSI. That still leaves LSI with a current market valuation of $43. The market needs to fully grasp the concept that the startup costs of Gresham are rapidly ending, and that LSI is about to have a cutting edge fab in a market where there may ultimately be shortages in the .18 and .25 market segments. Thus, a higher price to sales multiple for LSI would seem to be in order--or at the very least, there seems to be significant downside cushion. And as always, the best days for SOC are just straight ahead with PS II being a potential monster not to mention the growth in communications, networking, and Fibre Channel. Regards to all (And in the bonds to Ruby's Boy and Lemeul 5 Steps) Jock (out of here 'til the earnings announcement when I will do my usual report and already working on as nasty an August 18 anniversary message to K The Investor as I can possibly create.)

To: Jock Hutchinson who wrote (17919)	4/11/1999 5:07:00 PM
From: Grand Poobah	Read Replies (1) \| Respond to of 25814

And this leads to Patrick's scenario of imminent shortage of capacity at the .25 and .18 level. IF we see a capacity shortage at these levels, what are the fabless companies going to do? My understanding is that there is capacity available from foundries at the smaller geometries right now. Predicted shortages have not developed yet. My info comes from a private, not a public source, but I think it is valid nonetheless. That doesn't mean a shortage won't develop in 6 months or 12 months, but the foundry industry has grown so much that any future shortages at small linewidths may not be as severe as they were in the past. JMHO, G.P.

To: Jock Hutchinson who wrote (17919)	4/11/1999 5:09:00 PM
From: patrick tang	Read Replies (1) \| Respond to of 25814

Jock, LSI did do foundry work before and I believe in a time of need, they will do that again. Again, in foundry work, you only make money for the wafers but not the IP part, so it's better to do their own product if possible. I think they are ramping Gresham as fast as they can and there really is no capacity for any foundry work. As they can see filling up the fab in the next year or two, they should not do foundry work. Foundry customers expect and gets wafer start allocations that one cannot just cut off just like that when the good time comes. As such, no reasonable customers will engage with LSI now for any serious work as they also can see that LSI cannot provide a long term relationship at this point. I think LSI is not going or isn't really compared now to Intel, Altera, Xilinc, Novellus and AMAT. I think it is now being grouped with ADI, STM, TXN, VLSI. That's the reason for the stock being touted now and being revised upwards now. I don't look for LSI to be priced in the mid 60s because it does not have the history of sales growth, earnings growth as the other companies. Hopefully, if LSI does it good job and create that history over the next two years, it will be revised up to that. Hence my decision to go with LSI instead of the usual XILN, TXN or ADI in the beginning. The other ones will do 2x to 3x over the next two years, not counting the bash last Nov. But LSI may have a potential to do better because it is a 'turn -around' situation. Blue bird - take a little bit more chance, maybe get rewarded later. patrick