Wednesday, October 21, 2009

Sandisk (NASDAQ:SNDK): Negative commentary following results

Sandisk (NASDAQ:SNDK) is getting some negative commentary this morning following blow-out results announced last night:

- UBS is out reiterating their Sell rating (while admittedly raising their target to $20 from $18) noting that SNDK Q3 results were significantly above their forecasts on newly ramping OEM sales that drove a third of the sales growth, and GM and royalties that were above mgmt’s prior outlook. Despite the strong OEM backlog for Q4, they still believe order momentum will moderate by late Q4 as AAPL and other smartphone vendors launch products for the holidays. UBS views retail demand as performing modestly better than expected, but still subject to price elasticity.

They expect demand to moderate by late Q4 as holiday builds conclude.

- JP Morgan is reiterating their Underweight rating saying SNDK beat 3Q09 expectations, in part owing to one-time benefits, but also due to strong sequential growth in the OEM market, atypically strong NAND pricing, continued improvement in COGS, and disciplined expense containment. Guidance points to further improvement, but future earnings power still seems weak by 2005-2006 standards, and fragile to the extent that pricing and margins are still dependent on the behavior of larger competitors. They are raising estimates,increasing their price target to $18 (from $15.50), but maintain their Underweight rating.

- Morgan Stanley notes that despite strong beat and raise results on better than expected handset OEM unit demand and cost reductions, they recommend investors to take profits as they see signs of NAND component pricing peaking in October ahead of 1Q seasonal decline. SanDisk stock shows a 90% correlation to NAND component pricing. Morgan Stanley's checks in the memory food chain suggest that spot pricing is getting choppy, which is typically an early sign of pricing peak. In addition, SNDK retail sales were flat Q/Q in 3Q, which shows that the consumer is not willing to pay more at the current price levels. Longer-term, they remain constructive on NAND supply-demand fundamentals but believe stock pulls back in Nov-Jan period on NAND pricing softening.

Despite better than expected results, they see stock fairly valued ~$23 (18x 10' EPS) with risk to the downside ~$18 in the near-term given impending seasonality. Firm prefers MU to SNDK on lower retail exposure (less seasonal) and PC related DRAM enterprise demand next year.

Morgan Stanley is also establishing a negative Research Tactical Idea on SNDK saying they believe the share price will fall relative to the industry over the next 60 days. They estimate that there is about a 70% to 80% or "very likely" probability for the scenario.

* In order to stay objective here are the more positive comments on SNDK: *

- Goldman Sachs maintains Buy and $24 price target on the name saying they are comfortable with investors continuing to own SNDK as long as NAND supply/demand dynamics remain favorable. However, with SanDisk approaching their price target for those looking to put new money to work, they would recommend SPE names such as LRCX that are most leveraged to a pick up in NAND spending, as they see greater relative upside in the SPE stocks vs. SanDisk

- Deutsche Bank reits Buy and raises their target to $32 (from $23) saying that although inventory benefits are likely to moderate they believe the company is poised to deliver organic margin improvement due to ongoing cost reductions and benign pricing. Combined with superior rev growth (+3% y/y in 2009E vs. industry -15%) and a focus on free cash flow suggest further upside is likely.

Notablecalls: I think SNDK is an ACTIONABLE SHORT above the $23 level today. Here's why:

- It did beat expectations but so did INTC, CAT, TXN etc. All of these are trading below the beat levels.

- We have Morgan Stanley out with a negative RTI (Research Tactical Idea) - people follow these and are out shorting/selling SNDK today.

- I have said it before and I will say it again - this stuff is not sustainable. SNDK isn't even generating free cash flow despite all the ga-ga. Pricing will decline.

1 comment:

nick said...

Cash flow from operations was a strong 238 million and we utilized 18 million for CapEx and other investments plus generating free cash flow of 220 million for the quarter.