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

To: Rex Dwyer who wrote (1933)	12/4/1997 3:23:00 AM
From: Rex Dwyer	Read Replies (2) \| Respond to of 60323

* Digest of Merrill Lynch analyst Tom Kurlak's SNDK report * Date 10/22/97 Price $27 5/8 Selloff unjustified. ST and LT Accumulate 12 mo price target $40 Estimates 1996A: $0.60 1997E: $0.80 1998E: $1.03 4Q97 EPS: $0.29 est. Investment Highlights Valuation at 27x 1998 is attractive for a 44% grower. Our $1.03 1998 eps reflects expected competitive pressures. Selloff is unjustified, stock's decline is a buying opportunity. Fundamental Highlights Comments from company were conservative, but no unanticipated problems exist. Falling commodity flash prices are not bad news for SanDisk. If anything, the trend should be good news for the company. CompactFlash is solidly in position as the defacto standard for removable solid-state memory storage. SNDK's competitive strength in CompactFlash market continues to be strong. Seasonality may cause weak 1Q98, but that is not a surprise. Order visibility for SanDisk's CompactFlash cards is low for the first quarter of next year. We're in agreement with the company that seasonality will probably cause 1Q98 profits to decline relative to 4Q97 - our 1Q98 earning estimate of $0.23 reflects that fact. The seasonality is to be expected, however, and it says nothing about either the success of the CompactFlash format or SanDisk's ability to compete. All companies in the consumer electronics industry tend to experience slow first quarters following the Christmas season. High deferred revenue indicates an increase in retail distribution, but not a stuffed channel. The amount of the company's deferred revenue for 3Q97, which at $31.9M, is substantially higher than the $3.4M reported in 2Q97. The figure has been interpreted as evidence that the channel is stuffed. We find that interesting, as our own checks with retailers reveal no excess product at all. We think that SanDisk's move into retail distribution has caused a natural increase in the amount of product in the pipeline as companies stock up for Christmas. We expect most or all of the deferred revenue in question to be recognized in 4Q97. Margins will come under pressure - this is already reflected in our forecasts, and not a new development. Our model has margins decreasing to 43.1% in 4Q97. The overall 1998 gross margin is forecasted at 42.5%. Weak commodity flash pricing is not bad news for SanDisk. The company buys flash memory from its fab partners, then uses that flash as part of the CompactFlash that it assembles and sells itself. To the extent that prices are weakening, the trend is good for SanDisk. Reasonable comments by the company have caused a disproportionate movement in the stock price. We see absolutely no evidence that the dominance of the CompactFlash standard is in question, or that SanDisk's ability to compete in the CompactFlash market has been impaired. We therefore reiterate our intermediate-term and long-term investment recommendations of Accumulate. T. Kurlak 10/22/97