LSI Life Storage Inc

Earnings estimates of LSI Coporation (LSI) have inched up after the company reported better-than-expected results for the fourth quarter and provided a positive guidance for the first quarter of 2012.

The current Zacks Consensus Estimate is $0.47, up $0.03 in the last 30 days. 2 out of the 6 analysts covering the stock have upped their estimates for 2012 in the last 30 days while one moved in the opposite direction.

LSI is excited about the new product cycle ramps, accumulated share gains and new opportunities ahead in areas like SandForce flash storage processors, PCIe flash adapters, HDD SoCs, SAS for Romley and multicore processors and custom products for networking.  LSI Corp. has been taking strategic steps to improve its business model and transform into storage and networking company over the past two years.

LSI recently completed its acquisition of Sand Force, Inc. for $322 million. The acquisition is expected to strengthen LSI’s strong position in storage technology solutions. The acquisition is expected to strengthen LSI’s strong position in storage technology solutions.

We view this acquisition as positive as it will also use the cash derived from the divestiture of the external storage systems business (accounting for roughly 27% of total sales) to NetApp Inc. for $480 million in cash. The acquisition is also expected to enhance LSI's competitive position in the fast-growing server and storage PCIe flash adapter space. Management stated that PCIe flash-based adapters and flash storage processors will together represent a greater than $2 billion TAM expansion for LSI in the next several years. SandForce is expected to generate revenues of $60 million in 2011.

On May 6, 2011, LSI completed the sale of its external storage systems business to NetApp. The financial results of the external systems business have been classified as discontinued operations.

With the divestiture of storage systems business, LSI has transformed into a pure play storage and networking semiconductor company.  We believe the divestiture of the storage systems business will positively impact the margin structure along with ramp up of higher margin networking and SAS products. We expect margins to steadily pick up in 2012.

Although the supply constraints in the HDD business seem to have eased of late and the company should return to growth in 2012, we continue to maintain a Neutral recommendation.

In the short-run, we have a Zacks #2 Rank, which translates into a short-term Buy rating.

 
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