Monday, June 25, 2012

SanDisk (NASDAQ:SNDK): Up to Buy: Supply pushouts should drive margins and stock higher - Goldman

Goldman Sachs is upgrading SanDisk (NASDAQ:SNDK) to Buy from Neutral with a $45 price target this morning as they see an attractive entry point for the stock:

1) Post NAND industry oversupply and price pressure in 1H12, the firm expects a return to supply/demand balance by 4Q12 as they believe suppliers such as Samsung and Hynix are pushing out capacity expansion and shifting some NAND fab capacity to
logic;

Their Asia team believes Samsung is currently in the process of converting 70k NAND wafer capacity in its Austin fab to logic wafers to satisfy its application processor business; They now believe SK Hynix is in the process of scaling back its previously planned capacity expansion in 2H12

2) Goldman expects modest gross margin expansion for SanDisk in 2H12 given
tighter supply dynamics;

3) Long term, they see outsized SSD exposure for SanDisk relative to peers;

4) Valuation has become compelling with the stock trading at just 5X 2013E product earnings (given $15 in net cash/share plus $12 in royalty value).

Although they expect a weak 2Q report and see risk to Street estimates for 2Q and 3Q (firm is cutting 2012 their EPS to $1.70 from $1.80), the firm thinks the stock can move meaningfully higher through year end as they expect reduced supply growth to drive improved NAND industry fundamentals, which should lead to a gross margin recovery for SanDisk in 2H12. Based on their recent Asia trip and other checks, Goldman now believes NAND suppliers are pushing out capacity expansion given current industry oversupply. Coupled with seasonally stronger demand in 2H, the firm expects supply cuts to drive improving NAND supply/demand, with a likely undersupply situation in 4Q.

They expect SanDisk to see gross margin expansion in 2H12 – and gross margin is strongly correlated with the stock’s performance.

Goldman also has a constructive longer-term view of SanDisk’s opportunity in the solid state drive (SSD) market in 2013 and beyond, where they continue to believe that SanDisk should see outsized growth relative to peers with nearly 25% of sales from SSDs in 2014.

Notablecalls: Goldman's comments regarding NAND capacity expansion cuts at Samsung and Hynix are likely to be well received by market participants.

They downgraded SNDK on Jan 3, which proved to be a wise call as the stock got almost halved from there. With Goldman telling clients to jump back in I would expect some buy interest in the name.

Today's gap-down open in major indicies may provide an excellent s-t entry point.

One to watch.



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