Why SanDisk's Stock Is A Long-Term Investment Opportunity Right Now

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 |  About: SanDisk Corporation (SNDK)
by: Arie Goren

My favorite sectors for my own investments are the basic materials and the tech sector, perhaps because I find it more interesting to research companies from these sectors. I am always looking for a combination of value and growth stocks, and if the company also pays a dividend it is even better. One such a company is SanDisk Corp. (NASDAQ:SNDK), which its stock, in my opinion, is a remarkably promising long term investment.

SanDisk Corporation is a global leader in flash memory storage solutions with a strong history of innovation that has been successfully commercialized. Flash storage technology allows digital information to be stored in a durable, compact format that retains the data even after the power has been switched off. The company is also a major supplier of solid state drive, or SSD, solutions for client computing platforms and enterprise data centers, and removable and embedded memory products for mobile devices, cameras and other devices. SSD does much the same job functionally as a hard disk drive HDD, but instead of a magnetic coating on top of platters, the data is stored on interconnected flash memory chips that retain the data even when there's no power present.

SanDisk announced its fourth-quarter fiscal 2013 earnings report on January 22, which beat EPS expectations by $0.15 and beat on revenues. SanDisk's success was mainly attributable to strong client and enterprise SSD sales, strength in retail businesses and favorable supply demand metrics. Fourth quarter revenue of $1.73 billion increased 12 percent on a year-over-year basis and increased 6 percent sequentially. Total revenue for fiscal 2013 of $6.17 billion increased 22 percent from $5.05 billion in fiscal 2012. On a non-GAAP basis, fourth quarter net income was $390 million, or $1.71 per diluted share, compared to net income of $257 million, or $1.05 per diluted share, in the fourth quarter of fiscal 2012 and net income of $371 million, or $1.59 per diluted share, in the third quarter of fiscal 2013. Net income for fiscal 2013 was $1.27 billion, or $5.31 per diluted share, compared to $582 million, or $2.38 per diluted share in fiscal 2012.

Now let's look at the numbers, SanDisk has recorded strong revenue and EPS growth during the last five years. The average annual sales growth for the past five years was high at 13%, and the average annual EPS growth for the past five years was very high at 20%. According to Yahoo Finance, SanDisk's next financial year forward P/E is at 11.13, and the average annual earnings growth estimates for the next five years is at 12.50%, these give a very low PEG ratio of 0.89, one of the lowest among S&P 500 tech stocks. The PEG Ratio - price/earnings to growth ratio is a widely used indicator of a stock's potential value. It is favored by many investors over the P/E ratio because it also accounts for growth. A lower PEG means that the stock is more undervalued. Furthermore, SanDisk is generating a lot of cash; its ttm price to free cash flow of 10 is among the lowest of all S&P 500 tech stocks. Many investors prefer using free cash flow instead of net income to measure a company's financial performance because free cash flow is more difficult to manipulate. Free cash flow is the operating cash flow minus capital expenditure.

The company continues to deliver large sums of cash back to shareholders. On July 31, 2013, SanDisk announced that it has expanded its capital return program with the initiation of a quarterly dividend and the authorization of $2.5 billion of additional stock repurchases. SanDisk has not paid dividends before, and although the forward annual dividend yield of 1.31% is modest, it represents only 10% of the company net earnings, allowing SanDisk enough cash to continue investing to increase the SSD product portfolio and strengthen enterprise go-to-market strategies.

Conclusion

SanDisk has recorded strong revenue and EPS growth, and it has compelling valuation metrics and strong earnings growth prospects. Furthermore, SanDisk returns value to its shareholders by stock buyback and by dividend payments. The company benefits from its leading position within the accelerating transition from hard disk drive to solid state drive. During the latest quarter, SanDisk continued to increase the revenue contribution from SSDs, which rose to 21% of revenue. Most growth in SSD continues to come from enterprise SSD. CEO Mehrotra noted that enterprise storage solutions, including SSD, are expected to be SanDisk's fastest-growing category in 2014.

All these factors lead me to the conclusion that SNDK stock is a smart long-term investment.

Disclosure: I am long SNDK. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.