Cary,
I know that you like to follow a company for ten years before you consider investing in it, but I was wondering if you had any preliminary thoughts on Sandisk and its valuation.
Here are a few statements culled from a leading analyst's finance.yahoo.com latest report [Paul Coster/ JP Morgan]:
Reiterate Overweight. SNDK is trading at 17.3 times revised FY05 EPS, and 15.5 times FY06 EPS. The NAND Flash product market growth remains buoyant and SNDK is uniquely well positioned as the only vertically integrated pure play in the
space, with what appears to be sustainable competitive advantage from intellectual property and cost leadership, which should be enhanced with the activation of Fab3
in 4Q05....
Investment Thesis
Consumer demand for NAND Flash is growing dramatically owing to 35 - 45% CAGR decline in the cost of manufacture per megabyte, which is enabling the introduction of new memory applications at mass-marget price points. At present over 60% of SNDK's sales originate in after market sales of memory cards, however mix will shift toward memory cards for use in mobile phones, USB Flash drives, Flash-drive audio players
(MP3 and WMA), and other applications. SanDisk estimates that the addressable market will expand from just under $8 billion in 2004 to nearly $16 billion in 2007. SanDisk is
the leading global supplier of memory cards, and has established a global brand and distribution (over 114,000 outlets, including 22k mobile storefronts). The company possesses important patents (284 US patents, 300 pending) for NAND technology (including MLC), for controllers and at the system and form-factor level (hence at least $205-215M of licensing revenues are expected in 2005), and is vertically integrated (70% of NAND supply is from captive sources), which combine to yield cost leadership and a sustainable competitive advantage.
Valuation and Rating Analysis
Consistent with other stocks under coverage, we are basing our valuation on calendar year 2005 earnings projections. SNDK is currently trading at 17.3 times our revised 2005
EPS forecast, a 27.6% discount to the mean of our coverage universe, but trading at a PEG of about 0.98 (based on 3-year pre-tax net income growth). In our view the stock
deserves a higher valuation (closer to the mean multiple for our coverage universe), as we consider SanDisk the leading company (with sustainable competitive advantages and
growing market share) in a fast growth market. We believe there is upside to our forecasts in the event that SNDK's ramping 90 and 70nm production cannot be matched
by manufacturing competitors (other than Samsung). There is potential 2H06 upside from the likely licensing payments SNDK will receive from Samsung as the latter activates MLC manufacturing production. We also believe SNDK's competitive situation could dramatically improve as smaller Flash product companies struggle to remain profitable owing to dependence on non-captive supply.
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Note the "competitive sustainable advantage" theme. Do you agree?
Sam |
