Updated from 10:30 a.m. EDT Investors thrashed shares of LSI Logic ( LSI) 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.
Parmigiani called LSI's results "mixed" and lowered his price target from $11 to $8.50. But he said the valuation is attractive, noting the stock trades at a price-to-earnings multiple of 19.1 times his 2005 estimate of 44 cents, relative to a historic P/E range of 20 times to 35 times. He has an overweight rating on the stock; Lehman has done investment banking for LSI. On Tuesday the Milpitas, Calif.-based outfit delivered second-quarter profits of $7 million, or 2 cents a share, up from a loss of $162 million or 43 cents a share, one year ago. Excluding special items, profits totaled $28 million, or 7 cents a share, a penny ahead of expectations. A year earlier, the company showed a pro forma loss of $6 million or 2 cents a share. Second-quarter revenue of $448 million was up 10% and exactly even with the Wall Street consensus estimate as tallied by Thomson First Call. Sales declined 1% from the prior quarter. However, the company said its sales and earnings for the third quarter will likely come up short of analysts' expectations. LSI projected revenues of $435 million to $465 million, excluding the effect of a potential IPO in its storage systems business. Profit should range from breakeven to a loss of 3 cents a share. On a pro forma basis, the company expects net income of 3 cents to 6 cents a share. Analysts were looking for 9 cents earnings on $479 million in sales in the third quarter. In a prepared statement, Chief Executive Wilfred Corrigan said: "Late in the second quarter, we saw some slowing of the overall business that is carrying over into the third quarter. However we expect the second half of the year as a whole to be stronger than the first half of the year, driven by continued growth in consumer electronics and an improvement in IT orders from our customer base later in the year."
Elaborating on the trend in a Wednesday morning note, Fulcrum's Clark Fuhs noted that shipments of storage components were down 6% sequentially in the second quarter, as customers began trying to pare down excess inventory. "This inventory correction also impacts the third quarter," he noted. "Customers that started correcting inventory early in the second quarter are already starting to increase order rates again, according to the company, but many others have not." LSI management expects the inventory correction to be resolved during the third quarter and is expecting storage silicon to grow again in the fourth quarter, however. Fuhs, who like many other analysts lowered his estimates on the stock, has a neutral rating on LSI. "While the company is in a position to have levered earnings, the sub par top-line growth prospects and the implications of spinning a high-growth business in storage systems pushes us to prefer the higher-growth names with earnings leverage on our buy list," he wrote. Fulcrum has buy ratings on Maxim ( MXIM), Micrel ( MCRL), National Semi ( NSM), Texas Instruments ( TXN) and Intel ( INTC).