Tuesday, February 27, 2007

Color on analyst event: Sandisk (NASDAQ:SNDK)

- Goldman Sachs notes SanDisk's analyst meeting on 2/26/07, featured "the good, the bad and the ugly" of incremental news:

1) Good news - SanDisk may add new licensees in 2007, which would be a significant positive given concerns about the sustainability of royalty sales. Margins are also expected to return to more normal levels in 2008/2009 post a very challenging 2007;

2) Bad news - near-term fundamentals remain very weak, with ASPs expected to fall in excess of 55% yoy in 2007. Firm believes the excess supply problem that is driving weak ASPs is well understood by the market. In the near-term, the problem is being addressed by NAND capacity being allocated to DRAM and NAND capacity additions being slowed. To that end, SanDisk has reduced its capex significantly versus earlier projections, which should have negative implications for the SPE stocks. In the intermediate/long-term, they expect excess supply to be absorbed by new NAND end markets, including PCs and video;

3) Ugly news - 2007 margin projections are worse than anticipated, with product gross margins guided to 12-23% and operating margins guided to -8% to 4%. Firm is cutting their 2007 EPS estimate to $0.95 from $1.30 on lower margins, but is raising their 2008/2009 estimates to $2.15/$2.70 from $2.10/$2.60 on an anticipated improvement in margins.

SanDisk remains Goldman's best buy idea over the next 9 months given their expectation of improving NAND supply/demand dynamics in CY2H07 and their view that the stock offers a favorable risk/reward trade-off. Maintains $46 tgt.

- Baird notes Sandisk's tone was unusually cautious during its analyst day held yesterday. Based on the forecast range provided by the CFO, downside exists to their 2007 numbers while 2008-09 figures suggest continued secular declines in profitability beyond the current cycle, which could lead to further multiple contraction, in firm's view. Longer term, Micron/Lexar could offer a first-time challenge to SanDisk's retail market share. Too early to buy, in Baird's view. Neutral rating.

Notablecalls: I continue to see very little reason to buy SNDK around current levels. Please see archives for further color.

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