He’s raising his rating from Hold to Buy. “We believe the rising tide of inflecting semiconductor fundamentals will likely lift all boats between now and year-end, including shares of LSI,” says Berger.
We believe LSI is in the early stages of a SAS product cycle in its offerings for both systems (Engenio) and chips. We expect the firm to show solid growth in its LSI storage offerings once past the seasonally and cyclically weak Q1 […] We believe there is a solid likelihood that management can cut more than its guidance of $125 million of annual cost savings, or roughly 4% of combined annual spending (cost of goods sold and operating expenses). Each $10 million of cost cutting (0.3% of total annual spending) will drive an additional penny of EPS.
Berger’s forecast for profit from the combined company next year is 73 cents a share, ahead of estimates of 71 cents (though his estimate this year, 55 cents, is below consensus 59 cents). Berger sees the stock going to $13 over the next 12 months, almost 30% upside.
And things could get better for peers, too, is the implication of Berger’s note:
Several broadline firms have called Q1 the cyclical and seasonal trough for the semiconductor industry, including ON Semi (ONNN), Microsemi (MSCC), and International Rectifier (IRF). Further, this cycle has played out nearly two years after the prior semiconductor cycle, which means chip stocks could heat up in late 2007 or early 2008.
LSI shares today are up 3% at $10.05.