Wedbush Morgan analyst Craig Berger sent a note to clients on LSI Logic (LSI). Key points:
* There has been significant speculation that LSI Logic has won some low-end server business (Engenio) with Dell (DELL) and possibly with Sun Microsystems (SUNW) as well, a potential positive for the stock. Awaiting more visibility into the timing and magnitude of such design wins.
* Sensitivities show that each $100 million of annual server revenues is worth about $0.08 to $0.10 of EPS, thus suggesting that investors should not chase shares at current levels on ramping strength in low-end servers, absent improved visibility into the size of such wins.
* Wedbush Morgan recently lowered the bar for LSI's consumer business for 2H'06 and 2007 in light of customer PortalPlayer's (PLAY) recent announcement that they will not be supplying chips for the iPod Nano.
* LSI management's cost cutting and business realignment actions are positive moves that sharpen the firm's focus on its core enterprise storage and consumer markets. Nonetheless, management will need to show evidence of material topline growth to push its earnings power higher, and to push its target multiple towards the 18-20x range.
* To summarize, no change to estimates, HOLD rating, or our $11 price target. Risk/reward remains neutral in light of lower consumer (iPod) revenue contribution, mediocre storage business trends thus far in 2Q'06, and substantial restructuring of driven cost savings already reflected in consensus models.
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