SanDisk Flashes A Buy Signal

3/17/2014


  Recent Price
$75
  Dividend
$0.90
  Yield
1.2%
  P/E Ratio
14
  Shares (millions)
233
  Long-Term Debt as % of Capital
22%
  52-Week Price Range
$77.17 - $50.68

SanDisk ($75; SNDK) makes flash-storage products used in laptops, mobile phones, gaming devices, and other consumer electronics. It also builds flash drives that let users transport digital data. These products include solid-state drives (SSD) known for their speed and durability — two qualities that have contributed to their popularity in mobile devices.

The company's first SSD, launched in 1991, cost $50 per megabyte. Today, one megabyte of storage costs a tenth of a penny. Persistent pressure on pricing is offset by a seemingly insatiable appetite for more digital memory. Demand for SSDs should benefit as smaller, super-thin laptops command a larger share of the personal-computer market.

Consensus estimates project 8% growth in per-share profits for 2014, compared to just 3% average growth for S&P 1500 Index computer storage and peripherals stocks. Yet SanDisk trades at just 13 times estimated 2014 earnings, a 21% discount to its peer-group average. Earning a Quadrix Overall score of 98, SanDisk is a Buy.

Business breakdown

SanDisk sells SSDs to most of the leading personal-computer manufacturers. It took share in the SSD market in 2013 by growing its business with Apple ($536; AAPL), which accounted for 20% of the company's sales. Sales to makers of electronic or computing devices and computer-systems integrators generated 63% of 2013 sales, with distribution to retailers accounting for the remainder. It also licenses some of its technology, and earlier this month a jury awarded SanDisk $28.5 million in damages for a patent lawsuit.

Two factors make the company's profit margins volatile. First, ebbs and flows in industry supplies can cause sharp fluctuations in storage prices, especially in the commercial market, where brands are less important. Second, SanDisk incurs most of its product costs in Japanese yen, exposing the company to currency fluctuations.

SanDisk's gross profit margins jumped more than 13 percentage points to an all-time high 51% in 2013 and could hover near those record levels this year. Industry fundamentals still appear attractive, with fairly stable prices and supply trends.

The company's free-cash-flow yield is 9%, ranking in the top 8% of the S&P 1500. SanDisk generated a record $1.54 billion in free cash flow last year, compared to $42 million in 2012. It repurchased enough shares last year to reduce its stock count by 4.6% and initiated a quarterly dividend in July. In all, SanDisk returned 98% of free cash flow to shareholders last year.

Conclusion

Some warrants (derivatives that can force SanDisk to convert debt into common stock) are currently in the money, increasing the likelihood of share dilution. Management also expects higher capital spending to reduce free cash flow in 2014. Nevertheless, SanDisk plans to spend 70% of free cash flow on buybacks, offsetting any dilution. The company expects the share count to be flat to down 2% this year, though some analysts expect the share base to shrink further.

An annual report for SanDisk Corp. is available at 951 SanDisk Drive, Milpitas, CA 95035; (408) 801-1000; www.sandisk.com.

SANDISK
Quarter
Per-Share Earnings*
($)
Sales
Change
Quarterly
Price Range
($)
P/E Ratio
Range
Dec '13
1.71
vs.
1.05
12%
70.93
-
59.16
15 - 13
Sep '13
1.59
vs.
0.48
28%
63.97
-
53.09
18 - 15
Jun '13
1.21
vs.
0.21
43%
63.73
-
50.68
25 - 20
Mar '13
0.84
vs.
0.63
11%
56.49
-
44.30
24 - 19
           
Year
(Dec.)
Sales
 ($Bil.)
Per-Share
Earnings*
($)
Per-Share
Dividend
($)
52-Week
Price Range
($)
P/E Ratio
Range
2013
6.17
5.31
0.45
70.93
-
44.30
13 - 8
2012
5.05
2.38
0.00
53.08
-
30.99
22 - 13
2011
5.66
4.65
0.00
53.60
-
32.24
12 - 7
2010
4.83
4.60
0.00
52.31
-
24.90
11 - 5
 
Quadrix Scores †
Overall
Momen-
tum
Value
Quality
Financial
Strength
Earnings
Estimates
Performance
98
94
80
90
79
46
78

   * Earnings exclude special items.
   † Quadrix® scores are percentile ranks, with 100 the best.


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