LSI Guidance Is Soft

Updated from 10:30 a.m. EDT

Investors thrashed shares of LSI Logic(LSI Quote - Cramer on LSI - Stock Picks) Wednesday, on the heels of its earnings report after the close Tuesday. The communications and storage chipmaker swung to a profit and squeaked in a penny of earnings upside but offered weak guidance and news of an inventory build in its storage business.

The stock was recently down 82 cents, or 14%, to $5.02. Soft third-quarter revenue guidance prompted several analysts to pare their 2004 and 2005 earnings outlooks.

Banc of America's Sumit Dhanda pointed out that LSI's third-quarter revenue outlook, a range of down 3% to up 4% from the second quarter, is below the five-year average of 6% growth.

Dhanda cut his calendar year 2004 estimate to 27 cents from 35 cents and his 2005 estimate to 34 cents from 40 cents.

In his take on "the big picture," Dhanda sounded doubtful of LSI's optimism that demand would strengthen in the second half of 2004. "With an inventory correction solidly in place, and demand decelerating, we are, however, hard pressed to think that industry-wide chip demand for the third quarter will rapidly rebound, and even track to seasonal norms. If our hypothesis is indeed true, it suggests that further estimate reductions -- and by extension lower stock prices -- lie ahead," he wrote.

Dhanda has a sell rating on the stock; Banc of America has done investment banking for LSI in the past 12 months.

A slightly more hopeful note was Lehman's Ted Parmigiani, who noted that LSI management expects an inventory pipelines buildup in storage components to be "largely worked off" during the third quarter of the year. LSI's consumer chip business has gotten a big push from the growth of DVDs, with DVD recordable product sales growth of 44% from the prior quarter. As prices on DVD recorders drop to less than $200 this year, LSI should continue to get a boost from the segment, he noted.