Monday, February 12, 2007

Calls of Note Part 1

- Citigroup comments on Sandisk (NASDAQ:SNDK) saying they have been on the sidelines with SanDisk shares this year, concerned about downside risks ahead of possible positive catalysts including SanDisk's February 26th analyst day, 2Q's new product activity, and June's iPhone launch. Friday's 1H February contract price declines, while not a new area of risk, nonetheless: 1) create worse 1Q07 pricing than recently feared, 2) suggests steeper-than-expected 2007 headwinds in SanDisk's core business, and 3) argues Street EPS for 2007 remain too sanguine on pricing and gross margins. The somewhat distant silver lining is that this year's pricing pain increases the probability that new demand drivers such as PC hard drive replacement and high-density video products can emerge in the 2H08 time frame. In summary, pricing and negative estimate revision risk from a positively-biased Street stance suggests it will be difficult for the analyst day to be a meaningfully positive catalyst.

NAND contract prices plunged again. 1HFeb fell 15% so 1Q07 now on track for a 36-40% decline vs 30-35% expected three wks ago (Samsung, Hynix). CIR C07/08 EPS dn $0.07 and $0.14 to $1.33/$2.10 vs St $1.94/$2.54.

Positively-biased Street (11 Hold, 12 Buy, no Sell) will defend but the firm sees unattractive risk/reward as downside of 15% vs upside of 10% on new $44 TP (Street TP of $58 to come dn).

While a trough multiple suggests downside to $30, the firm thinks the shares would be unlikely to trade below 16-17x 2008E, or to ~$34, down 15% (shares have proven resilient below $40) versus upside potential of 10%. CIR expects Street EPS estimates to begin cleaning up at the analyst day, but perhaps more significantly in late- March ahead of SanDisk's print. Volatility around such action could create an entry point if SanDisk's new product story can come together.

Maintains Hold.

Notablecalls: I don't think the stock will suffer much following the call. But I do expect the stock
to decline over the next couple of months. There is no reason to own this one around current levels.

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