QLogic Pricing in a Miss, May Have $1 Worth of Upside

Merrill Lynch notes QLogic (QLGC) has sold off since January due to concerns over slowing growth in the FC-Switch business and speculation surrounding a potential miss for the Mar-07Q. However, at 15x CY07e EPS (ex-cash), the stock appears to be pricing in a miss already. MLCO expects the switch business to regain momentum in 2H and see upside potential from InfiniBand. They think additional share buy backs are also likely and believe the risk/reward is favorable for investors with a 2+ qtr horizon.

They expect HBA revenues (85% of sales) to grow in the low to mid teens over the next few years. The Fibre Channel market appears healthy and the firm expects the 4G transition to continue for the next few quarters. Though virtualization is beginning to impact server unit growth negatively, it should have a positive impact on HBA growth as virtualization accelerates the transition to storage area networking.

Despite the recent disappointment in the FC-switch market (12% of sales), the firm continues to believe that QLogic will benefit from the BRCD/MCDT merger longer term. InfiniBand is a new opportunity for QLGC and they expect revenue ramps from this product line in the next 1 - 2 quarters. QLGC has multiple design wins and is well positioned to gain share in this $300M market. Firm thinks street expectations for this business are conservative and see upside potential in 2H07. Reits Buy.

Notablecalls: Would not be surprised to see some buy interest in QLGC over the next week or so. The stock has been lagging the general tech group and may have around $1 worth of upside in it. Not a high conviction call.

QLGC 1-yr chart