LSI Corp: Strong Earnings; Cheap Stock
Frank is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
LSI Corp (NASDAQ: LSI) reported Q1 earnings after the bell on Wednesday. The company handily beat analyst's expectations, reporting non-GAAP earnings of $0.20 per share on $622 million revenue. Wall Street had expected the company to post earnings of $0.14 per share on revenue of less than $600 million.
LSI is a worldwide leader in the development and marketing of semiconductors and software for hard disk drives, flash drives, and networking equipment. As I wrote in a post last week (Seagate Technology: A Dividend Stock Significantly Undervalued), the demand for storage is increasing exponentially as more data is being loaded into the cloud (think Facebook and Twitter just to name a couple). As hard disk drives and flash drives meet the increasing demand, LSI benefits.
In the company's earnings press release President and CEO Abhi Talwakar said “The significant revenue growth was driven by better-than-expected growth in our HDD business, strength in our new SandForce flash business and contribution from various new product cycles. Going forward, LSI is firmly established as a central player in some of the most critical growth trends in computing, including cloud, Big Data, mobile networking and flash, with products that are bringing exciting new levels of speed and productivity to our customers.”
LSI purchased SandForce, which makes processors for solid-state flash drives, in January. Until then, LSI had not focused on the flash drive business.
LSI's Q1 revenue from operations represented a nearly 32% increase over the year earlier period. The company has a stellar balance sheet with no debt and $1.10 per share cash on its books. It's LSI's establishment as a central player in critical growth trends that will drive the company's earnings higher in the coming years. Analysts currently expect LSI will earn $0.68 per share in 2012 and $0.81 per share in 2013. Estimates for 2012 earnings are likely to be low. LSI guided Q2 earnings higher, predicting they would earn $0.15-$0.21 per share versus the $0.16 per share analysts estimate.
Despite the expectations that earnings will continue to grow, shares of LSI are cheap. The stock currently trades for about 10 times 2013 estimates. If you take into consideration the cash per share, LSI's P/E is even lower. LSI has a price-to-earnings growth (PEG) ratio of just 0.9. It trades at a price-to-owner earnings multiple of 15. LSI's CAPEX/cash flow is only 25%, meaning that the business is not as cost-intensive as one might think.
Out of 14 analysts that cover LSI, 10 rate the stock a strong buy or buy. Only one analyst rates LSI a sell. By keeping the valuation low, it seems investors are making LSI prove itself. Shares of LSI are absurdly cheap for the growth industry that it's in. Investors were concerned that LSI was not operating in the flash storage market. LSI addressed that concern with its SandForce aquisition, which seems to be paying off for the company.
With shares of LSI well off their 52 week high of $9.20, investors should consider the future prospects of the company. LSI is in one of the fastest growing segments of technology. Any company that is a leader in the field of data management and storage is worth taking a second look at. LSI has a pristine balance sheet and excellent growth. It may be time for investors to put their chips on this chip maker.
fjconstantino has no positions in the stocks mentioned above. The Motley Fool has no positions in the stocks mentioned above. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
