Monday, November 20, 2006

Calls of Note Part 1

- Citigroup notes the closure of the SanDisk (NASDAQ:SNDK) and mSystems transaction does not change their view of near and long-term share price prospects for the new SanDisk entity. Yet, 4Q06 end demand has been largely uninspiring with October's US retail sell through data for cards, drives and MP3 players sub-seasonal and with SanDisk observing bifurcated card and MP3 market share trends. On the other hand, SNDK has reiterated its OEM-centric handset card business is constrained by tightness in the assembly and test part of its extended supply chain.

While evidencing solid demand pull, this could also be an indication that competition is heating up in this secularly advantaged end market given increased handset card controller output recently at Silicon In Motion. As spot prices have drifted steadily lower in the past month SNDK's shares have steadily lagged the market, now down 12% QTD versus a 6% gain by the SOX. Looming 1H07 seasonality is likely to discourage a sustained rally, though a"catch-up" trading rally into the low-50's is possible into SanDisk's CES presentation, especially as valuation now appears low. Further out, 1H07 pricing seasonality sustains risk to the $40 level, though 12- month reward potential appears to the mid-60s. Reiterates Hold rating on SNDK shares.

Notablecalls: CES will take place early Jan resulting in several new product announcement in the portable EC space. That may indeed drive the stock higher. Not a high conviction call.

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