Sunday, December 5, 2010

Company Focus: SanDisk Corporation


Prognosticating the future using crystal balls, tea leaves or entrails is only a little less risky than forecasting paradigm shifts in technology. I believe we are at the cusp of change in regard to where we store our ever growing cache of files. As I see it, there are two competing technologies emerging. On the one hand, there is the almost limitless capacity of the cloud; on the other hand, flash memory. The advantage of the cloud is the previously unlimited capacity. The downside of the cloud includes issues of security and privacy. Flash memory offers greater security but, as of today, greater cost. Both of these technologies will expand in the future. For the foreseeable future, the old fashioned hard disk drive will remain the dominant form of mass storage. 

Any discussion of flash memory and the emerging technology of solid state drives must include SanDisk Corporation (SNDK). SanDisk describes itself as “the world's largest supplier of flash data storage card products, designs, manufactures and markets industry-standard, solid-state data, digital imaging and audio storage products using its patented, high-density flash memory and controller technology.”
The Company’s products are ubiquitous in such consumer products as digital cameras, digital camcorders, GPS devices, MP3 players, gaming consoles, USB flash drives and the new, dedicated e-books. Sandisk products also are prominent is the fast growing smartphone market. The new market for flash memory resides in the various computer form factors. The here today, gone tomorrow netbooks, notebooks and tablet computers. 

At the present time, the mobile and imaging markets are the largest growth drivers for SanDisk. These segments, combined, account for 70% of the company’s growth. Looking to the future, will SSD be a mega-trend? It is still too early to tell. The technology needs to develop further and costs must decrease substantially for SSD to really take off. If tablets become this decade’s major product innovation, then SSD price/GB will decline as storage capacity builds. Let us not forget that SanDisk partners with both Apple (AAPL) and Samsung by supplying the memory for the Ipad and Galaxy tablets. SanDisk also supplies the memory for the Iphone and other smartphones.

Is SanDisk in a financial position to exploit these developments? 

We will start with the balance sheet. The Company ended 3Q10 with $2,903.8 million in cash and short-term investments and $1,687.8 million in long-term debt. Long-term debt to equity is 32.5%. Long-term debt to capital is 24.6%. Interest coverage is 83.6X. The current ratio is 4.4X and the quick ratio is 3.8X. Total liabilities/free cash flow is about 2X. SanDisk is not overleveraged and can easily meet its short-term cash requirements. The Company has grown equity by 14.5% over the past seven years. ROE is 25.9% and ROA is 17.1%.

For the twelve month period ending October 2010, SanDisk reported sales of $4,741.0 million and EPS diluted of $4.85. Earlier this year, the Company provided some guidance on sales. They project FY11 sales in the range of $4.75billion to $4.825 billion. Thomson Reuters reports analyst revenue estimates for FYE 12/10 to range from $4,693 million to $4,797 million and for FYE 12/11, $4,308.8 million to $5,866 million. Earnings estimates for FYE 12/10 range from $4.31 to $4.56; for FYE 12/11, $2.45 to 4.88.

Year-over-Year, sales have grown nearly 49% and EPS diluted about 164.9%. Long term, the Company’s sales and EPS have been erratic as has free cash flow. Profit margins have been all over the place with 2008 being a disaster.

SanDisk is a healthy company well positioned to benefit from the smartphone and tablet wars. They offer leading-edge technology strong partnerships with industry leaders. At a recent price of $48.31, SanDisk has a PE of 10X, a PB of 2.1X and PS of 2.3X. With an estimated future growth rate of 14.33%, the PEG Estimated EPS is 0.8X. By these measures, SanDisk appears to be a growth stock masquerading as a value stock.

Disclosure: Author has a long position in SanDisk and no position in Apple or Samsung.
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