Thursday, October 19, 2006

Calls of Note Part 1

We have several interesting comments on SimpleTech (NASDAQ:STEC) this morning:

- Thomas Weisel Partners believes shares of SimpleTech were down sharply (10.3%) on
Wednesday (October 18) due to speculation that the company had controller failures in its industrial flash products, which could result in significant share loss at Cisco, STEC's largest customer in this segment. In firm's view, a forecast of a dramatic reversal of fortune in this segment is highly improbable.

STEC has significantly improved its profitability in recent quarters by increasing its penetration of the industrial flash segment (currently approximately 25% of sales and doubling y/y), which carries gross margins in excess of 50%. Firm believes much of the gains have resulted from Sandisk's departure from this market nearly two years ago.

They believe the speculation of product issues at Cisco and share loss to ST Micro is unrealistic due to the following reasons. 1) SimpleTech has been in volume at Cisco for multiple quarters, and it is unlikely that a controller issue would emerge on already mature volume products. 2) they believe that SimpleTech's industrial flash products support multiple (likely 10-plus) business lines at Cisco, so a problem (if there were one), would likely have a local and not broad effect. Maintains Peer Perform.

- CIBC is reiterating their SO on STEC, while increasing price target (from $6.50 to $10) and estimates. Firm's checks indicate that STEC's commercial OEM flash traction and NAND-in-PC prospects are better-than-expected, and thus, they view Wednesday's pullback as a strong buying opportunity.

Firm believes Wed's 10% decline was due to fears that STM is taking NAND- server-drive share at Cisco. However, checks indicate CSCO qualified STM in 4Q05 ONLY as a 2nd source, and STEC's pole position (~80% share) is secure. Moreover, they expect STEC's '07 CSCO revs to double to $60M+.

At ~18x firm's new '07 EPS est ($0.45), STEC trades at an ~18% discount to its peers (22x). Rather, they feel STEC should command a premium PE due to its growing & relatively-unopposed penetration of high-margin/visibility OEM flash markets and its coveted-lead in the emerging NAND-SSD-in-PC space.

Notablecalls: Take a look at STEC's chart. Things like these do NOT turn on a dime. STEC may bounce today but I think we may see some selling before it does. One to keep on the radar.

No comments: