QLogic: Business May Strengthen In June

QLogic (QLGC), which makes storage equipment for companies to organize files between collections of disk drives, is cheap despite a disappointing quarterly report last Friday, or so says Morgan Keegan analyst Harsh Kumar in a report today in which he raises his rating on the stock to Outperform from market perform.

Despite missing sales and profit estimates when it reported last week, QLogic is set for rising demand for its products in the second half of this year, says Kumar.

I have to say, it’s hard to get excited when Kumar points out a number of lingering flaws in his bullish take on the company, including QLogic’s development of more low-margin goods, and the substantial gaps in its product line:

We believe QLogic’s fundamentals are bottoming and expect significant sequential growth to resume in the second half of calendar 2007. We see significant growth resuming in the September quarter, driven by the ramp of InfiniBand product revenues, a strong pick-up in switch related business […] and growth in the core HBA arena. Management guided for June quarter gross margin to be flat with the March quarter at 67.5%, which declined 230 bps sequentially largely as a result of the ramp of lower margin InfiniBand products. Customers are transitioning from Fibre Channel controllers to SAS and SATA technology, where QLogic does not have a product. Management also commented that they were being cautious considering the soft IT spending and economic environment. […] [W]e believe the core HBA and switch growth is not quantitatively reflected in the outlook. The company could have upside to the mid-point of its June quarter revenue guidance to the tune of $2-4 million.

Sounds like a pretty mixed bag to me, but Kumar says QLogic is cheap trading at 17x his estimate for the fiscal year ending next March of 95 cents a share, which is actually 14x if you back out cash of $3.42 a share, he says.

Today, QLogic stock is up 1.53% at $16.54. The stock is down almost 25% this year.

QLGC 1-yr chart: