Art
Great discussion. Some comments on some of your thoughts.
The convertible preferred provided a yield less than a straight bond, owing to its convertibility, but didn't dilute the shares until it was actually called.
Actually, the shares from the convertible notes have been included in the diluted share count for quite awhile, all of 2003 in fact. Convertible notes are considered "dilutive" when they are "in the money", not when they are callable. Since the notes are convertible at a price of $9.22 per share, they have been in the money for quite awhile, and therefore in the diulted share count.
$17 for SNDK? That would mean a forward looking PE of about 10, or it would mean that earnings will be drastically reduced.
Consider that SNDK hit the $19 range less than 2 months ago. A dropped to $17 isn't inconceivable in my mind. Especially if there is a downturn in the economy or the semi industry. All it takes is one of the big players in the semi industry to warn of slowing sales/mounting inventories and the whole industry is affected.
Yes, I do expect the "e" in the p/e to slide in 05. Consider that 60 days ago the consensus analyst estimate for 05 was $1.65. It has since been revised down by 21% to $1.30. I can easily envision a nasty, irrational pricing environment where SNDK cuts pricing further to hold market share thereby reducing the "e" to around $1 for 05 and yielding a 17 p/e. Just look at the drop in ASP the last 5 quarters and note the acceleration....
9/04 -22%
6/04 -16%
3/04 -4%
12/03 -2%
9/03 -3%
Note the benign pricing environment last year and compare that to what is happening today. In SNDK's last CC they estimated a further 30% drop in ASP for just the 4th quarter. My price checks show that some products (512M CF & SD) have already dropped by 35%+. The issue SNDK (and other companies like LEXR) faces in this kind of a pricing environment is increasing unit sales enough to offset the per unit drop in ASP. This is a very, very difficult feat to pull off as SNDK proved in the 3rd quarter. There is a study by McKinsey that I like to reference when price wars erupt. According to the study, for every 5% drop in ASP, a company needs to increase the number of units it sells by 18% to maintain margins. Assuming just a 30% drop in ASP in Q4, SNDK would have to increase unit sales by 108%. In fact, to get to $500M in revenue in 4Q, SNDK will need to increase unit sales by about 95% as follows (rough calculation)...
Q3 Product Rev - $365M
Q3 Product Rev (with 30% ASP reduction) - $256M
Q4 Product Rev Est (provided by SNDK) - $500M
Unit Increase Required - 95% (500/256)
So the McKinsey study appears to have some validity. Ok, this post is getting kind of long. It has been fun debating the investment merits of SNDK with you.
Best,
Broozer |
