LSI Logic Soars as Optimists Look Past Next Quarter

The chip company is up 23% even though guidance was slightly worse than expected.
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spiked in afternoon trading Thursday, only a day after the chipmaker issued humdrum guidance that prompted several analysts to chop their 2003 profit estimates. The reason: A couple of optimists now claim the company's business is bottoming, and are already casting a hopeful gaze to the upside.

The stock was up $1.18, or 23.4%, to $6.22 in recent trading.

Although the company's third quarter topped expectations, LSI's fourth-quarter outlook hardly seemed the stuff to send investors clamoring for more: Both earnings and sales are expected to be below analyst estimates.

The chipmaker forecasts fourth-quarter revenue to be flattish -- in the range of $475 million to $500 million, compared to current expectations for $509 million. Earnings per share are expected to be 0 to 2 cents, below the existing 3-cent forecast.

In fact, the outlook for LSI's core business is meeker than that, stripping out sales from the recently acquired

Mylex

, which is expected to contribute about $21 million in the next quarter. Without Mylex, LSI's sales would be flat to down 5% sequentially, says Bear Stearns analyst Charles Boucher.

"The company indicated in the last 6-8 weeks visibility has deteriorated and customers have become extremely cautious," he added in a note. "The month of September was a very weak month, and customers have set very pessimistic expectations for the fourth quarter." In light of sagging demand, he gave a haircut to his 2003 earnings outlook, trimming projections from 42 cents to 31 cents.

Despite the estimate cuts, Boucher has an "outperform" rating on the stock, arguing there's "little downside risk" at current levels. The firm hasn't done banking for LSI.

Likewise, Wells Fargo analyst David Duley said he believes LSI "has passed the bottom, as it reported 11% sequential revenue growth in the third quarter and guided to flat, plus or minus 2%, revenue growth for the fourth quarter. The company expects improvement in all segments in the fourth quarter except for consumer, which is due to seasonality."

He said he's also impressed with LSI's cost-cutting efforts and the fact that it returned to profitability in the fourth quarter, one quarter ahead of schedule. Duley, whose firm has no banking relations with LSI, has a buy rating on it.

But a report from UBS Warburg sounded decidedly more jaundiced. The firm kept its hold rating, with a 12-month price target of $8. "Low visibility, declining utilization rates and uncertain end market demand do not inspire us to upgrade our opinion at this time," wrote Thomas Thornhill. UBS has no banking relations with LSI.

Granted, he said, by some measures LSI's valuation looks reasonable. It trades at 1.1 times on a price-to-sales basis, based on Wednesday's close of $5.04. That's a 37% discount to the historical trough of 1.7 times.

But on an earnings basis, he estimates forward fair value is closer to $7, based on an 18 times price-to-earnings ratio applied to forward 12 months' earnings of 37 cents.

Lehman's Dan Niles sounded even more standoffish, dropping his price target from $9 to $6. Though business is improving and the price-to-book of 1 is "interesting," he said in a note, "the 15%-20% consensus growth expectations for calendar year 2003 seem aggressive to us." He has an underweight rating on the shares; Lehman has done banking for LSI.

Wednesday, LSI delivered a solid earnings report, besting Wall Street profit expectations by 2 cents.

Its net loss was $28 million, or 7 cents per share, as calculated by generally accepted accounting principles, an improvement from last quarter's 17-cent loss. The chipmaker reported a pro forma profit of 4 cents, beating expectations for a 2-cent loss.

Sales of $487 million were also above the Street consensus, which was calling for just under $480 million.

The company said revenue was up 11% sequentially and 23% above year-ago levels, adding that this marked its fourth consecutive quarter of growth.