Wedbush Morgan analysts Craig Berger and James Schneider sent a note to clients yesterday reiterating their 'buy' rating on LSI Logic (LSI) and noting progress in the company's restructuring. Key points from the note:
* LSI Logic announced the next phase of its cost cutting and business realignment actions in a move that sharpens the firm's focus on its core enterprise storage and consumer markets, a positive move that we believe will make the firm leaner, more nimble and more focused on fulfilling its customers needs.
* Management expects the firm will lower annual SG&A spending by $15 million as it reduces overhead spending for Engenio Systems and its communication chip business, a positive $0.04 annual EPS benefit that we are now including in our 2007 estimates.
* About $30 million of annual R&D spending will be re-directed from efforts including development of communications, ZSP and RapidChip products to core focus markets in storage and consumer, a positive for 2008 revenue growth opportunities.
* We believe gross margins have upside driven by reduced depreciation associated with the discontinued status of LSI's Gresham fabrication facility as LSI goes fabless.
* Raising 2007 EPS estimate from $0.75 to $0.78, and price target from $12 to $13; reiterate BUY rating as we believe the firm's new management team will drive EPS higher via cost cutting activities, a move to fabless manufacturing and enhanced cross-selling opportunities between its storage systems and component businesses.
LSI 1-yr chart: