However the revised capex will push SNDK into negative cash flow position in 2008 and 2009 and even in 2010 the company will only be modestly cash flow positive. Meanwhile SanDisk’s lease guarantees are expected to balloon from $1.1bn in 2007 to almost $2.4bn in 2010.
You have to read very carefully what they are saying and interpret it correctly. They are talking about cumulative CFs and NOT CFs from Operations. FWIW, cumulative CFs for Sandisk were negative in 2007. There is nothing wrong with this on an occasional basis and is even normal for companies to last a few years, especially when they are expanding rapidly. Of course, such a situation cannot continue for extended periods of time, else the company will go belly up!
There are 3 types of CFs-
a. CFs from Operating Activities,
b. CFs from Investing Activities, and
c. CFs from Financing Activities.
When you look at the slide that Judy presented on Analyst Day, it talks about Capex requirements (Cash outflows from Investing Activities) for 2008, 2009 and 2010 but doesn't provide all the details as to how this planned capex will be financed. They did mention 4 sources of funds- Return of Capital from JV, JV Working Capital, JV Operating Leases and Cash. Now Operating Leases are an off-Balance Sheet liability which doesn't appear anywhere on their Balance Sheet but it is clear that they will borrow that money from leasing companies and Sandisk, as a corporation, will guarantee that borrowing.
As for the remaining three items, and in particular Cash (let's ignore the other two to make it simple), the actual source of how that Cash is generated is not mentioned anywhere on that slide! Company generates Cash in many different ways and it could come from any of the three CFs that I mentioned above. If it is coming from Operating activities, it is generally considered healthy. Although, even when Cash is generated from Operating activities, one has to still look at it very carefully and pay attention to whether is it coming from higher margins (and in turn generating higher profits) or by reducing A/Rs (collecting money from customers faster than usual) or by increasing A/Ps (delaying payments to Suppliers) or by liquidating Inventory (dumping goods and converting them into Cash- Checkout what QI did last Q and I would expect something similar from MU, when they report in early April). If Cash is generated from the other two CFs, they may or may not be good because either you are selling Assets (not good unless you are selling something that is obsolete) or you are borrowing more (more debt implies higher risk of default and increased cost of servicing debt) or raising Cash by selling new Stock (depending on the price, it could be dilutive).
So, Sandisk has generally been able to generate positive Operating CFs over the last several years and I would expect that to continue but they have not grown as nicely as they should have when you look at their revenue growth. Margins are under pressure and it is clear that for 1H08 (and possibly for the whole of 2008) the contributions of profits towards Operating CFs will be lower than previously modeled by analysts. Remember, the best way to value a company is to estimate their CFs accurately for the next several years and discount them back to PV at an appropriate discount rate that reflects the riskiness of the business. It is not easy to always do this, but that's the best way to value a company. Earnings that a company reports can be easily fudged in many different ways. In any case, if I write more, I would be digressing from the original topic!
To make a long story short, I expect most of the Cash that is needed over the 3 years will come from Operations but they will burn some of the Cash at hand too. Hope this answers your question. |
