Thursday, December 14, 2006

Calls of Note Part 3

- Citigroup notes they employ monthly US retail sell-through data (source: NPD) to pulse SanDisk's (NASDAQ:SNDK) memory card, USB drive and MP3 businesses which together comprise ~60% of the company's total product revenue. On the surface, November's overall data depicts a solid month for industry and an even better month for SanDisk on unit, bit growth, and revenue parameters. Firm finds this a welcome sign. That said, on further analysis MP3 sales are actually somewhat troubling given the unsustainable downshift toward SanDisk's 1GB offering while the micro-SD card category clearly shows increasing competition.

Looking ahead, December pricing typically increases while average densities decrease on lower-ticket purchases. However, recent contract price weakness casts some doubt that the typical seasonal increase will be observed this month. Net net, November's data leaves the firm comfortable with their bit growth estimate which is 500 bps above SNDK guidance, though they continue to believe pricing will be moderately worse than current Street expectations and company guidance (-22% vs. -17% Street estimates). In addition, they remain concerned that Street 1Q07 royalty revenue estimates remain lofty.

In summary, for SanDisk's stock price November's performance should add ballast to fundamental downside support near the $40 level (15x P/F12M EPS ests), though an unfavorable NAND industry backdrop is likely to limit meaningful share appreciation near-term, in particular given a lack of sustainable catalysts for the next six months.

Maintains Hold.

Notablecalls: Not actionable but good to know category. Looks like the $40 level will be the line in the sand for SNDK.

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