Friday, October 20, 2006

Color on quarter: SanDisk (NASDAQ:SNDK)

Mixed opinions on SanDisk (NASDAQ:SNDK) following results.

- Citigroup downgrading SNDK to Hold from Buy as the catalysts are not emerging as expected. While the headline numbers were positive, important details raised concerns. Pricing -25% vs. firm's -18%, gross margins 260 bps below their est., op income missed their est. by $2M despite $8M of royalty upside, and interest income added $0.03 not in their model.

Firm expects estimate revision trends, an important catalyst, to go against their expectation. A more cautious stance on 4Q06 and 1Q07 pricing and margins results in lower 4Q06E and 2007E EPS. Firm expects Street EPS to decline modestly as well.

Lower estimates yield a lower target price and less upside. Firm reduces their 2007E EPS to $2.84 from $2.97 and price target to $66 on unchanged multiples.

- Goldman offering explanation to their $46 price tgt: (1) a 25X multiple applied to 2007E product EPS of ~$0.80, and (2) their estimate of the present value of royalties of ~$25/share, assuming SanDisk is able to add licensees and thus grow royalties at ~5% in perpetuity. Given rich valuation and their expectation of weaker pricing heading into earnings, firm says they should have downgraded the stock. However, the sell off post the results will reduce potential downside. This, coupled with the volatility of the stock, makes them hesitant to downgrade now. However, firm would not buy the stock on a pullback as they see weak supply/demand dynamics in 2007 given significant incremental supply and less potential incremental demand. Further, they believe SanDisk's comment that NAND is less profitable than DRAM, as well as similar commentary from Samsung, Novellus, ASML and Micron, should cause investors to question their bullish SPE view.

- UBS offering very contrary view, shaking their heads in disbelief about the stock's sell-off in the afterhours.

Firm views Q3 guidance for 50-60% bit growth with 15-20% ASP decline as an exceptionally solid outlook, and are raising their sales est to $980M (from $939M), and pro forma EPS estimate to $0.81 (from $0.78). Excluding an unexpected jump in SG&A for marketing and promotions to around $93M (prior est $69.5M), their new EPS est would have been $0.89.

Firm believes SNDK is executing well to a sound strategy of driving down costs, driving up functionality, and sparking elasticity of demand and new applications, the most significant being NAND cards in handsets. As it does so, firm is seeing rivals struggle, divert capacity, and in some cases quit the market.

Notablecalls: Look, NAND is taking the same way that DRAM has used to take for quite some time - oversupply & pricing pressure. Tough to like the stock in a situation like this. That said, SNDK is a bouncer and that's what I think the stock will do today too.

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