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

To: Art Bechhoefer who wrote (27975)	4/22/2005 10:16:04 AM
From: pompsander	Read Replies (4) \| Respond to of 60323

Merrill reiterates Buy and 30 buck price target...interesting analysis.. finance.messages.yahoo.com Q1 results highlight attractive business model In our view, SanDisk continued to demonstrate the superiority of its attractive business model. While we had hoped for higher Q1 sales, improving manufacturing yields allowed SanDisk to post a record-high product gross margin of 37.2%. The resulting earnings of $0.39 per share exceeded even our street-high estimate of $0.35. From here, it is increasingly important for SanDisk to execute on its manufacturing plan. A successful transition to 70nm MLC and the ramp of Fab 3 in the second half of the year should allow SanDisk to retain its cost advantage over other suppliers. This should in turn improve profitability at the operating level. A smooth transition would allow SanDisk to improve operating margin in the second half of 2005. Reiterate Buy recommendation We are leaving our estimates unchanged at $1.50 for 2005 and $1.80 for 2006. A smooth transition to 70nm and 300mm would likely create upside to these estimates. Our model currently shows year-over-year bit growth of 157% and ASP decline of 55% in 2005. The stock, at 19x our 2005E earnings, continues to look inexpensive to us. Note that our long-term valuation model suggests the stock has a mid-cycle fair value of $30. The company has more than $7.50 per share in cash and a book value of $10.70. We reiterate our Buy recommendation and $30 price objective. Investors should focus on operating margin We advise investors to focus on the operating margin as a measuring yardstick for SanDisk’s financial performance for the remainder of the year. Over the intermediate term, we think gross margin has peaked given that normal price erosion will most likely outpace yield improvement from the 90nm transition. We think the 70nm transition is the next major cost reduction initiative. In addition, the startup costs for Fab 3 will begin to roll into cost of goods sold as early as Q3. We look for gross margin to improve again in the first half of 2006. Q1 top-line missed our estimate… SanDisk’s Q1 revenue of $451 million missed our recently revised estimate of $500 million, largely due to supply constraint of high-capacity cards in the first half of the quarter. It’s difficult to quantify the amount of sales that would have been recorded if there were no shortages. The 21% sequential decline in product revenue, to $400 million, is worse than the seasonal average due mainly to a tougher comp with the 14-week Q4. The pricing environment was more benign than previously thought, with ASP only declining by 10%. However, the 13% decline in bit shipment was disappointing, especially given that Samsung reported 38% sequential growth in Q1. Management suggested that the supply from FlashVision and Samsung was heavily back-end loaded. With SanDisk’s cycle time in the 6-8 weeks range, a majority of these products was still sitting on the balance sheet at the end of the quarter. Royalty revenue of $51 million came in better than expected. …but margin upside once again The product gross margin of 37.2% was the biggest upside surprise, easily beating our forecast of 32.0%. In addition to a moderate price decline, SanDisk continued to achieve strong yields from the transition to 90nm MLC technology, which accounted for more than 80% of captive production in Q1, as compared to 50% in Q1. Overall margin improved 7.2% points from Q4 as a result of reduced reliance on non-captive supply and higher royalty revenue. Despite the disappointing revenue, higher margins allowed SanDisk to post EPS of $0.39, beating our estimate of $0.35 and consensus estimate of $0.32.

To: Art Bechhoefer who wrote (27975)	4/23/2005 4:19:14 AM
From: Sam Citron	Read Replies (1) \| Respond to of 60323

wonder if anyone discussed the potential implications of the Lexar-Toshiba lawsuits. Here's what was said by Sanjay: (1) There were several inaccuracies in the news reporting on the case. (2) Sandisk has not been named in the lawsuit and has never received or used trade secrets. [The lawyer in me couldn't help thinking that this disavowal would have been more significant had it been uttered by Eli.] (3) There is no legal case for an injunction. (4) There will be no questions taken on the case in the Q&A portion of the CC. Sam