Pacific Crest’s Cheng Cheng this morning initiates coverage of chip maker LSI (LSI) with an Outperofrm rating and an $11 price target, writing that the company is “well positioned” in selling chips for data storage equipment and networking equipment, and that it can see profit margin expansion plus the benefit of an expanding line of chips for “flash” memory-based equipment.
Cheng’s model is roughly in line with consensus, projecting $2.64 billion in revenue this year and 76 cents a share, and $2.85 billion next year and 84 cents.
As regards Flash, processors for managing drives based on solid-state memory can have higher margins and are on a higher growth path than disk, Cheng points out. LSI in January bought privately held SandForce to gain expertise in the category:
The flash market is estimated to grow at a 31% CAGR through 2015. (Sources: IDC 2011, LSI) LSI�s large-client footprint through its SandForce acquisition, ex- isting expertise in RAID and SAS, and deep relationships with server and storage OEMs should allow LSI to take share in this rapidly growing market. We see $146 million in revenue and $0.06 EPS upside cumulatively in 2012 and 2013 between our estimates and an upside scenario. The current case assumes 100% growth in 2012 and 71% growth in 2013. Our upside scenario assumes 150% growth in 2012 and 100% growth in 2013. We see a potential positive gross margin benefit as revenue from flash-based storage solutions increases. We estimate around 60% gross margin for flash-based products versus the corporate average gross margin of 52.4% in the most re- cent quarter.
Cheng also believes management can meet a target for 55% gross profit and 25% R&D spend and 9% SG&A spend, outlined by the company in mid-March. That would be a 460-basis point expansion in operating profit margins from current levels, Cheng points out.
My colleague Vito Racanelli offered a fairly upbeat profile of LSI in Barron’s print magazine a couple weeks back. (Subscription required to read Barron’s print articles.)
LSI shares are up 7 cents, or almost 1%, at $7.67.
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