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Technology Stocks : WDC/Sandisk Corporation -- Ignore unavailable to you. Want to Upgrade?

To: Starlight who wrote (19342)	2/26/2001 4:53:39 PM
From: Road Walker	Respond to of 60323

First Union Securities Covers SNDK By: First Union Securities Inc. 2/26/01 9:37 AM Source: News.com Company Notes: Visit the CNET Brokerage Center for daily reports from the top Wall Street analysts. SanDisk Corporation (SNDK-NASDAQ) Target Price Change Reducing Estimates On Lack Of Near-Term Visibility Rating: 2 Price: $23.88 52-Wk. Rng.: $170-21 Shares Out.: (MM) 67.3 Market Cap.: (MM) 1,607.2 Key Points Limited visibility results in uncertain near-term outlook for SanDisk Reducing FY2001 and FY2002 estimates Maintaining our Buy recommendation with a new target price of $35 (based on a 20x multiple on our revised FY 2002 EPS of $1.75) Company Description SanDisk Corporation was founded by Dr. Eli Harari in 1988 to develop products for the emulation of hard disk drives utilizing flash solid-state memory. The company now offers a broad line of products in differing form factors and storage capacities designed to enable removable data storage in a wide range of applications. Limited visibility results in uncertain near-term outlook for SanDisk. Persistent signs of macroeconomic weakness and continued deterioration in technology sector fundamentals have combined to prompt us to reassess our expectations for SanDisk™s operating performance during the course of FY2001. While we continue to believe that SanDisk is in an enviable long-term position, we have elected to become more conservative in our near-term outlook as a result of the prevailing economic environment. SanDisk currently has extremely limited order visibility and is increasingly reliant upon ipturnslt (orders received and shipped during the same quarter) business for its near-term results. Additionally, high inventory levels and declining product prices could lead to lower-than-anticipated product gross margins during the first half of 2001. While SanDisk has several tangible reasons to expect an upturn in business during H2 2001 (including the launch of Palm devices and advanced cellular phones leveraging its SD technology), we believe that current macroeconomic conditions mandate increased conservatism in our operating model. Like many other companies, SanDisk is experiencing a difficult H1 2001 following an abrupt deceleration of business that began in late Q4 2000. OEM orders remain constrained as digital camera manufacturers and other customers work through inventories which they had accumulated in anticipation of a more robust Christmas season than occurred. Additionally, SanDisk is working though its own inventory of product and materials to which it committed in early Q4 2000 when customer order levels were more robust, forcing the company to live with a Q4 2000 cost structure during Q1 2001's more competitive pricing environment. While retail inventories appear to be at healthy levels and retail demand remains strong (spurred by declining prices) we are unsure that this will be sufficient to make up for the continued weakness on the OEM side of the business. While we remain optimistic for a partial economic recovery during H2 2001, we expect that any rebound would result in only a moderate increase in overall demand for consumer electronics products as consumers will most likely remain cautious until definitive signs of an economic recovery are present. However, we do recognize several potential factors that could materialize in H2 2001 to enhance SanDisk's prospects for a solid second-half operational performance and robust 2002. First, we expect the company™s product gross margins to begin to recover in Q3 as it is able to work through inventories of older product/wafers and take advantage of the reduced pricing available from its offshore foundry partners. Second, positive consumer reaction to the introduction of new SD/MMC enabled platforms (e.g., Palm PDAs, advanced cell phones, etc.) could result in a reacceleration in demand for removable flash memory products from both OEMs (bundling memory cards with their products) and retail channels (providing consumers with higher capacity cards). Third, the difficult economic environment in the first half of 2001 could result in further consolidation of the flash memory market, with SanDisk potentially capturing market share from weaker players. Finally, FlashVision (SanDisk™s fab joint venture with Toshiba) should come on-line in Q3, providing SanDisk with the industry™s lowest cost, highest capacity flash memory wafers (512Mb). While the margin benefit of FlashVision will be muted during H2 2001 due to start-up costs, SanDisk should derive meaningful benefit from FlashVision during 2002. Reducing FY2001 and FY2002 estimates. As a result of continued economic uncertainty, we have elected to take a conservative approach and further reduce our FY2001 and FY2002 estimates on SanDisk Corporation. Our reduced FY2001 estimates call for earnings of $72.2 million ($1.00 per share) from $628 million in revenue, compared to previous estimates for earnings of $94.5 million ($1.30 per share) from $787 million in revenue. While our outlook for FY2002 remains positive, our new numbers are reflective of our fears that a rebound may not materialize as rapidly as expected. We now expect SanDisk to earn $129.0 million ($1.75 per share) from $977 million in revenue in FY2002, versus our previous expectation for earnings of $154 million ($2.10 per share) from $1.23 billion in revenue. Maintaining our Buy recommendation with a new target price of $35 (based on a 20x multiple on our revised FY2002 EPS of $1.75). Despite limited near-term visibility and uncertain short-term fundamentals, we continue to believe that SanDisk is extremely well-positioned to capitalize on attractive emerging consumer electronics markets. We expect that advanced cell phones and PDAs with increased functionality will serve as new catalysts for growth in data-storage flash memory markets, with digital cameras, digital camcorders and digital audio product markets continuing to represent strong growth areas. In our view, SanDisk™s strong IP portfolio, strategic relationships with industry leaders and well-executed retail expansion position the company for long-term success in the high-density data storage flash memory market. We continue to believe that SNDK shares represent a solid investment for longer-term, growth-oriented, risk-tolerant technology investors seeking to capitalize on the growing demand for next-generation consumer electronics platforms. We maintain our Buy recommendation on SNDK shares with a 12-month target price of $35, based on a 20x multiple on our FY2002 EPS estimate of $1.75. Additional information available upon request. First Union Securities, Inc. maintains a market in the common stock of SNDK. The (an) author(s) of this note/report has (have) a long position in the securities of SNDK. First Union Securities, Inc., or a predecessor, managed or co-managed a public offering of securities for SNDK within the past three years. This is for your information only and is not an offer to sell, or a solicitation of an offer to buy, the securities or instruments mentioned. Interested parties are advised to contact the entity they deal with, or the entity that has distributed this report to them. The information has been obtained or derived from sources believed by us to be reliable, but we do not represent that it is accurate or complete. Any opinions or estimates contained in this information constitute our judgement as of this date and are subject to change without notice. First Union Securities, Inc. (icFUSIle), or its affiliates may provide advice or may from time to time acquire, hold or sell a position in the securities mentioned herein. FUSI is a subsidiary of First Union Corporation and is a member of the NYSE, NASD and SIPC. Copyright © 2001 First Union Securities, Inc. Information contained on this page is provided to CNET directly from the investment firm cited in this report.