LSI Corp. (NYSE:LSI) raised its Q1 adjusted EPS and revenue guidance last Wednesday, sending its shares up nearly 9% by the close. This newer guidance reflects better-than-expected strength in enterprise IT spending during LSI’s first quarter, which ends April 4th. CEO Abhi Talwalkar said,
as the majority of our revenues are tied to enterprise purchases of servers, data storage and networking infrastructure, we experienced strength across all product areas that exceeded our previous guidance.
The chipmaker now expects adjusted EPS of 7 to 11 cents for Q110, up from its prior guidance of 4 to 10 cents. The company also anticipates revenue between $620 million and $640 million, higher than its previous guidance of $590 million to $620 million. These new expectations came in higher than Wall Street’s current average expectation as well, which was for EPS of 7 cents on revenues of $608 million.
A recovery in business spending would bode well for the company, as it has already secured several design wins over the past several years that are starting to ramp in FY10, and will be even more material to results in FY11. These wins are a result of the company’s strategic product development in areas such as storage and networking, which are expected to be significant growth arenas in the next several years. Talwaker also noted during an investor conference last Wednesday that the company recently secured another important win to deliver next-generation networking equipment to a wireless infrastructure company, believed to be either Ericsson (ERIC) or Nokia (NO) Siemens (SI) Networks. Demand for products in these areas will only grow stronger as new mobile devices such as smartphones and netbooks continue to enter the market and require the support for the immense flood of data. LSI also is preparing for the cloud computing trend as it develops solutions in the SSD market.
All of this excitement as well as the higher expectations wouldn’t mean much if all of this was already priced into the stock. However, shares of LSI currently look undervalued according to The Applied Finance Group's (AFG’s) default valuation model, even after its big day last Wednesday. LSI has a Value Score of 95, meaning it ranks in the top 95th percentile of companies in the AFG universe in terms of valuation attractiveness. We have confidence in this value score because historically AFG has tracked the company very well, with an accuracy score of 93. Companies AFG identifies as undervalued have proven over time to be more likely to outperform companies with an unattractive default AFG valuation rank. Based on these factors, LSI looks well positioned to outperform.
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