SGI: Can This Company Be Saved?

In 1982, Silicon Graphics
was founded to build workstations that help develop high-end graphics. In
fact, the systems were used to model the dinosaurs in Jurassic Park. But in
the past few years, SGI has looked like a dinosaur itself.

The stock performance has been dismal. The 52-week range is 3 1/16 – 13 1/2,
with the stock currently at its low.

This week, the company warned that, yes, its quarterly results will fall
short of expectations. Whereas analysts consensus was for a loss of 14
cents a share, SGI believes it will be between 28 cents to 30 cents.
Revenues will be about $420 million. Projections had been pegged at $500

Actually, the company has been involved in a variety of restructurings over
the years. What’s more, the company has continued to disappoint Wall

In a way, this is kind of like the boy who cried “wolf” too many times.
Basically, Wall Street has lost confidence.

Despite all this, I think it may be time to consider the stock. The company
appears to be serious about making significant changes in its structure.

First of all, SGI announced that it will institute a program to cut costs of
about $100 million. There will also be assets sales, which are expected to
generate $400 million to $500 million. As of the last quarter, SGI already
had $185 million in cash. There will also be a stock buyback of as much as
50 million shares (the company has 183.5 million shares outstanding). Keep
in mind that the current market cap of SGI is $673 million.

Like many others, the company has suffered from component shortages. This
helps to explain the sales shortfall. But the company has said that it has
set forth plans to increase capacity. The company has also set milestones
to achieve. These include gross margins of 42.5 percent, as well as 10
percent in R&D and 18 percent for sales and marketing (these are percentages
of sales).

True, SGI is in a competitive marketplace and the growth rate is not at
rocket-speed. However, at its current valuation, the stock price does look
very enticing.

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