LSI Corp. (LSI) Could See Massive Upside on Cloud Storage, Flash Drive Growth - Barron's

April 23, 2012 9:10 AM EDT
LSI Corp. (NYSE: LSI) shares are indicated higher Monday morning following a bullish outlook from Barron's over the weekend which indicated potential 50 percent upside to its current trading level.

According to Barron's, LSI is expanding from simply developing hard and flash drive chips into developing equipment for network management and data flow, both areas which should see big growth in the coming years as more and more users flood the Internet.

Negatives for the company include its delay into the flash drive business, demand lag from Thai floods, and higher R&D costs. In addition, Barron's pointed out about 50 percent of LSI's revs come from just 10 large customers. Stronger competition from rival Marvell (Nasdaq: MRVL) will also pressure LSI, though Marvell was hit harder during the Thai floods last year.

But Barron's thinks LSI's investments will soon pay off as cloud storage and virtual networks continue to grow. R&D expenses are expected to down move from 30 percent in reported in 2010 to 25 percent in 2012 and 23.5 percent in 2013.

Shares of LSI have been rebounding in 2012, ascending 31 percent in the first few months to about $8 per share. The level is still about 20 percent below its five-year high around $10. Earnings growth for 2012 is projected at 21 percent to 80 cents per share. The projection gives LSI a P/E ratio of about 10 times, compared with the Standard & Poor's average of about 14 times. Applying a 14 multiple gives a stock price at $11.20, about 40 percent better than its current trading range...but that is said to be a little on the conservative side.

LSI's fundamentals have been making positive moves. Gross margin improved from 40 percent in 2010 to just about 50 percent last year. Operating margins have more than doubled to 15 percent over the same period.

With LSI CEO Abhijit Talwalkar seeing storage needs doubling every two years and Internet traffic growing just about as fast, LSI might have investors walking on cloud nine in no time. Shares are about 2 percent higher Monday.

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