Firm raises their FY10E EPS to $2.04. They believe SNDK is positioned for a solid 2010 with multiple tailwinds including: 1) Better-than-seasonal NAND pricing trends in a weak build season globally, 2) Leaner channel inventory, 3) Major OEMs Samsung, Hynix, Toshiba currently running at 100% utilization, 4) No new fabs slated for 2010 and supply coming mostly from technology shrinks. Firm believes that given supply constraints, NAND pricing could rebound earlier than expected in 1Q10 as new product cycles from Apple and handsets take hold.
ThinkEquity upgrades SNDK to Buy given robust trends in the NAND flash space. NAND pricing trends, down only 10%, have been better than seasonal pricing trends of down 10-20% and portend a strong 2010, in their opinion.
1) Their checks indicate NAND channel inventory continues to be lean as some of the NAND flash card inventory has been depleted early in the quarter. Firm believes that low-density flash cards are seeing good sell through into China.
2) Also, despite a weaker global demand, NAND OEMs Samsung, Hynix, Toshiba, and Micron are running at close to 100% utilization. We believe that both the lean inventory above and the peak NAND OEM utilization validate the stable pricing trends.
While they had been cautious on potential softer NAND pricing trends as consumer builds peak, they believe that current Spot trends point to a healthy supply chain and low inventory. ThinkEquity believes that the better-than-seasonal NAND pricing is a good lead indicator to potentially-stronger 1Q10 NAND pricing. They believe 1Q10 NAND pricing could rebound faster on limited NAND supply and new product cycles such as 1) a 64GB Apple Tablet (1M Tablet Equiv. to 4M iPhones), 2) Multiple tablet offerings from Dell, Acer, Asustek, andMSI, 3) iPhone builds, and 4) a Channel rebuild combined with the Chinese Lunar New Year, which could drive NAND demand in excess of 100% bitdemand Y/Y.
Firm thinks NAND pricing could trend up for most of 2010, given NAND demand growing potentially 100% Y/Y, supply constraints with OEMs currently running at full utilization and potential bit growth next year of 60-80% mostly with die shrinks from 4x to 3x nm, incremental wafer starts, and no new Fab adds.
They are raise their 2010E revenue/EPS estimates from $3.96B/$0.40 to $4.63B/$2.04, versus the consensus of $4B/$1.32 with a per-share market value of $35 from $21, 17x 2010E EPS and 2.5x tangible book value of $14.
Notablecalls: I must say, this is one gutsy upgrade from ThinkEquity's Vijay Rakesh. He is basically calling for un up-cycle in pricing & demand not seen since 2006. Take a look at what Morgan Stanley had to say about NAND pricing on Dec 16 when they issued a negative Research Tactical Idea on the name:
'...We believe the share price will fall relative to the industry over the next 60 days.
SNDK stock has outperformed the broader semiconductor group by ~ 2:1 in the last two weeks due to uptick in NAND memory spot pricing, making short-term valuation less compelling, in our view. We expect NAND contract pricing to decline in the near-term on seasonal demand weakness, which will likely cause shares to fall, as stock shows a strong correlation of 90% to NAND component pricing. We have two reasons to believe that NAND pricing will decline: 1) NAND component cost as a percentage of Smartphone (e.g. iPhone) bill of materials (BOM) has peaked at ~27%, which we believe will drive OEM's to demand lower pricing and 2) our data shows that SNDK's US channel inventory units are now above 08' peak levels, which could force lower pricing if US retail demand is slower than expected.
We estimate that there is about a 60% to 70% or "likely" probability for the scenario...'
Over the past couple of months we have had several tier-1 firms slap their Sell/Underweight ratings on the stock as they were anticipating a fall-off in NAND demand & pricing. It kind of looks like it hasn't happened and the stock has become a short-crusher.
It's up 7+ pts in the last 5 weeks and I'm kind of questioning the call out of ThinkEquity. Sure, it's gutsy & will make good for at least a 1pt move. But can you really buy SNDK here on hopes of selling it around $35?
Didn't think so.
Good mo-mo call, though. Especially with Micron (MU) blowing away the estimates.