TODAY - BARRONS ONLINE
Demand Returns in a Flash for SanDisk
By GREG BARTALOS
online.barrons.com
FLASH AND SUBSTANCE RARELY come in the same package. But they do with SanDisk, the largest supplier of flash storage used in digital cameras and other consumer electronics.
Its stock has lost half its value since hitting a 52-week high last November, woefully underperforming the Standard & Poor's 500 during that time.
Why did investors dump SanDisk's shares? They were afraid of excess supply caused by price cuts amid increasing competition.
But SanDisk's stock has outperformed the S&P 500 by ten percentage points since last month, when it announced strong second-quarter results powered by heavy demand for its products.
"The concerns were about new entrants and margins, and the second quarter proved them to be unfounded," says Tai Nguyen, analyst at Susquehanna Financial Group.
At a Glance
SanDisk Corp. (SNDK )
Stock Price: $21.19
52-Wk High: $43.15
52-Wk Low: $19.28
Market Cap: $3.4 Billion
Earnings Est. (2004): $1.46
Forward P/E: 14.5x
Projected Long-term EPS Growth: 21%
Projected EPS Growth ('04/'03): 22%
Sales (past 12 months, as of 06/30/04): $1.5 Billion
Div. Yield: N/A
CEO: Eli Harari, Ph.D.
Headquarters: Sunnyvale, California
Source: Thomson Financial/First Call, Yahoo! Finance
What's more, Wall Street expects continued strength in the markets that SanDisk serves, and a seasonally strong period is fast approaching. The company also has a highly lucrative licensing and royalties business, and the stock's valuations appear unreasonably low.
"In the low twenties, the risk/reward ratio [for the stock] is very favorable," says Christopher Bonavico, portfolio manager of Transamerica Investments, who thinks the stock is worth 40.
Flash memory products, most the size of a matchbook or smaller, retain data even when the devices they are in are shut off. By contrast, dynamic random access memory (DRAM) chips require continued power to store information.
SanDisk recently held a dominant 43% share of the U.S. flash card retail market, far ahead of runner-up Lexar Media at 21% and Sony at 11%, according to NPD Techworld and SanDisk.
"SanDisk is taking away market share from the second- and third-tier companies," says Nguyen.
Although it is airing some new television commercials on this year's Olympics broadcast, it also benefits from being the low-cost provider.
Daniel M. Gelbtuch, senior analyst at CIBC World Markets, says that SanDisk supplies most of its own memory through its fabrication plants in Japan with joint venture partner Toshiba; competitors buy memory from merchant suppliers like Samsung.
SanDisk's chief financial officer Judy Bruner adds that the company is now "working with Toshiba on a massive new fab in Japan."
Gelbtuch also says that SanDisk can fit two bits of data in a single flash cell, which has been a challenge for competitors.
"This gives significant cost benefits," says Gelbtuch. Every dollar of cost savings helps the company maintain gross margins.
More than 60% of SanDisk's memory cards end up in digital cameras whose worldwide sales are expected to grow by 41% to 76 million this year, says Daniel Amir, analyst at WR Hambrecht & Co.
The main reason for the growth is better technology at lower prices and the burgeoning popularity of digital cameras, which allow users to touch up, crop and email photos.
Revenue from sales to Universal Serial Bus (USB) flash drives and MP3 players comprises about 23% of revenues, while cell phones account for about 17% of sales.
SanDisk, which now distributes its products to more than 80,000 storefronts, should more than double that amount within the next few years, says Bonavico.
"Our target is to have the broadest portfolio [among our competitors]," says CFO Bruner, who calls the company's broad reach an asset in getting an instant audience with retailers like Best Buy.
Nguyen says SanDisk is boosting its retail presence by expanding to newer applications like global positioning systems (GPS) devices.
And now the company has operating momentum as it enters a seasonally strong period, usually receiving "a strong uptick in demand" during the back-to-school and holiday seasons, says Amir.
SanDisk also has a growing licensing and royalties business, which contributes about 10% of sales but kicks in 25% to 30% of profits, Amir notes.
Gelbtuch estimates that including licensing and royalties, SanDisk's gross margins should be at least 39% this year and next.
Surprisingly enough, the stock's valuations are still remarkably low.
SanDisk's P/E multiple of 14.2x projected earnings represents a five-year low, according to Thomson Financial Baseline (see At a Glance).
And the stock, which traded at a whopping 90% premium to the S&P 500's multiple for most of that same period, now changes hands at a 10% discount to the S&P.
SanDisk also has limited debt and about $1.3 billion in cash, more than a third of the company's market capitalization.
Despite this year's plunge, the stock has far outperformed the broader market, doubling since Barron's Online expressed concerns about commoditization of its products almost two years ago (see Weekday Trader, "Is SanDisk a Flash in the Pan?," October 24, 2002).
This recent big run, however, suggests the shares may be extra vulnerable to any selling pressure that could occur if supply and inventories build up too quickly.
Still, the company's earnings growth should remain buoyant in the future, because the markets that SanDisk serves show no signs of letting up.
With so much working in its favor, investors in SanDisk may enjoy a picture-perfect outcome after all.
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"put yours in ours" <g>
Steve |
