Wednesday, April 04, 2007

Calls of Note Part 1

- Bear Stearns comments on Sandisk (NASDAQ:SNDK) noting the recent tightening in the NAND market and resulting rebound in pricing has been partly driven by inventory replenishment and yield issues at manufacturers, which raises the concern that pricing could be flattish or under downward pressure once the inventory replenishment is completed and/or yields improve. Despite this "head-fake " risk, the firm expects any such risk to be temporary, as NAND industry fundamentals are indeed improving in 2Q07 from a supply versus demand standpoint, and they continue to believe that NAND supply-demand will be balanced in 2H07. At these levels the upside potential on the stock exceeds downside risk. Firm believes downside to the stock is $40 and upside is $55.

Though there are fears that capacity is on the verge of being converted back from DRAM to NAND, they expect capacity conversions from NAND to DRAM to continue in 2Q07. Based on their analysis, the firm does not expect conversions back to NAND to occur through 3Q07, and to occur in 4Q07 at the earliest. Global supply bit growth in 2Q is clearly going to be limited and less then demand growth. In particular, Samsung and Hynix continue to be cautious about their NAND capacity expansion and the firm expects their bit growth to be flat to slightly up in 2Q.

Although they are lowering their 1Q EPS from $0.12 to $0.08, the firm believes that 1Q is "water under the bridge". Investors should focus on SanDisk's earnings bottoming in 2Q and outlook for 2H07. 2Q EPS estimate is $0.01 (down from $0.04 previously), and they expect an improvement to $0.15 (down from $0.17 previously) and $0.44 in 3Q and 4Q, and to $2.58 in 2008.

Bear Stearns is reiterating their Outperform rating and price target of $55. While the stock could react negatively to flattish or downward movement in NAND flash pricing, which may occur in May/June given that inventory replenishment is likely to slow down at some point, they would use any pullbacks to accumulate the shares and get positioned for 2H07.

Notablecalls: Samsung and Hynix in aggregate represent 50-60% of global NAND supply. There are reasons for them to be cautious about adding capacity. After all, Samsung supplies NAND to Apple, while SNDK doesn't. As most of you know, the iPhone is seen as the main driver behind s-t NAND demand. Plus, there has been talk of supply constraints at Samsung that have added fuel to the fire. I'm not a SNDK fan and still see very little reason to own the stock here. I expect SNDK to see some s-t buy interest following the call from Bear Stearns (think there will see some similar calls over the next week or so) but eventually it's fadeable.

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