Why SanDisk Stock Is A Great Investment Opportunity Right Now

Jul.19.14 | About: Western Digital (WDC)

Summary

After the retreat in its stock price, it is now an excellent opportunity for a long-term investment in SNDK's stock at a reasonable price.

SanDisk will benefit from favorable market conditions for the NAND memories in the long term.

SNDK has compelling valuation metrics and very strong earnings growth prospects. SNDK's stock is ranked second among all S&P 500 tech stocks according to Portfolio123's "Balanced4" powerful ranking system.

Although SanDisk Corp. (NASDAQ:SNDK) reported on July 16 financial results that topped analysts' expectations, its stock fell 13.56% in the next trading day, mainly due to a moderate third-quarter revenue guidance. In order to support NAND pricing, SanDisk and other major Flash Memory manufacturers have restrained capacity additions. Therefore, SanDisk will probably meet capacity shortages in the next few quarters.

In my opinion, after the retreat in its stock price, it is now an excellent opportunity for a long-term investment in SNDK's stock at a reasonable price. SNDK's stock still has plenty of room to move up, because it has compelling valuation metrics and very strong earnings growth prospects, and because of favorable market conditions for the NAND memories and especially for the SSD drive in the long term.

The company

SanDisk Corporation is a global leader in flash storage solutions. SanDisk designs, develops, manufactures, and markets data storage products that are used in various consumer electronics products. The company was founded in 1988 and is headquartered in Milpitas, California.

Valuation Metrics

The table below presents the valuation metrics of SNDK, the data were taken from Yahoo Finance and finviz.com.

SanDisk's valuation metrics are very good; the trailing P/E is at 19.64, and the Enterprise Value/EBITDA ratio is very low at 8.68. According to Yahoo Finance, SNDK's next financial year forward P/E is low at 14.36 and the average annual earnings growth estimates for the next 5 years is very high at 18.75%, these give a very low PEG ratio of 0.77. 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.

Latest Quarter Results

On July 16, SanDisk reported its second-quarter 2014 financial results, which beat EPS expectations by $0.02 (1.40%) and beat on revenues.

Second quarter revenue of $1.63 billion increased 11 percent on a year-over-year basis and increased 8 percent sequentially. On a GAAP basis, second quarter net income was $274 million, or $1.14 per share, compared to net income of $262 million, or $1.06 per share, in the second quarter of fiscal 2013 and $269 million, or $1.14 per share, in the first quarter of fiscal 2014. On a non-GAAP basis, second quarter net income was $329 million, or $1.41 per share, compared to net income of $299 million, or $1.22 per share, in the second quarter of fiscal 2013 and net income of $330 million, or $1.44 per share, in the first quarter of fiscal 2014.

In the report, Sanjay Mehrotra, president and chief executive officer of SanDisk said:

We are pleased to deliver record second quarter revenue in both enterprise and client SSDs, as well as retail products. SSD solutions comprised 29 percent of our second quarter revenue, compared to 16 percent in the year ago quarter, demonstrating strong progress in driving our strategic priorities. Our results position us well to deliver another record year in 2014.

Competitors and Group Comparison

A comparison of key fundamental data between SanDisk and its main competitors is shown in the table below.

Source: Yahoo Finance, finviz.com

SanDisk has the lowest debt to equity ratio among the stocks in the group, and it is the only one that pay some dividend. However, its valuation metrics are not as good as those of MU.

SanDisk's Return on Capital parameters have been much better than its industry median, its sector median and the S&P 500 median, as shown in the table below.

Click to enlarge

Source: Portfolio123

Dividend and Share Repurchase

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. The company will complete part of this stock repurchase through a $1.0 billion Accelerated Share Repurchase agreement. SanDisk implemented a dividend on July 31, 2013 and made its first quarterly payment of $0.225 per common share in 3Q13.

The forward annual dividend yield is at 0.90% and the payout ratio is only 13.6%.

Since the company generates lots of cash, has a low debt and the payout ratio is extremely low, there is an excellent chance that the company will continue to raise its dividend payment.

Technical Analysis

The charts below give some technical analysis information.

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Chart: finviz.com

The SNDK stock price is 8.91% below its 20-day simple moving average, 4.15% below its 50-day simple moving average and 20.13% above its 200-day simple moving average. That indicates a short-term and a mid-term downtrend, and a long-term uptrend.

Click to enlarge

Chart: TradeStation Group, Inc.

The weekly MACD histogram, a particularly valuable indicator by technicians, is at 0.42 and descending, which is a bearish signal (a rising MACD histogram and crossing the zero line from below is considered an extremely bullish signal). The RSI oscillator is at 58.26 which do not indicate overbought or oversold conditions.

Ranking

According to Portfolio123's "Balanced4" powerful ranking system SNDK's stock is ranked second among all S&P 500 tech stocks; only Seagate Technology (NASDAQ:STX) has a higher ranking (see my SA article about STX). The "Balanced4" ranking system is quite complex, and it is taking into account many factors like; EPS consistency, technical analysis, valuation, profitability ratios and dividend information. Back-testing over fifteen years has proved that this ranking system is very useful.

Source: Portfolio123

Analyst Opinion

Many analysts are covering the SNDK's stock and most of them recommend it. Among the 30 analysts 10 rate it as a Strong Buy, 12 rate it as a Buy, and 8 analysts rate it as a Hold.

TipRanks is a website that ranks experts (analysts and bloggers) according to their performance. According to TipRanks, among the analysts covering SNDK stock there are 23 analysts who have the four or five star rating, 17 of them recommend the stock, and six analysts have a Hold rating on the stock.

On July 17, Wedbush's analyst Betsy Van Hees maintained an Outperform rating on SanDisk with a $105 price target following SNDK's strong 2Q14 results. I consider Ms. Van Hees' analysis very valuable, since she has 5-Star rating from TipRanks for the accuracy of her previous calls.

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Source: TipRanks

Major Developments

On June 16, SanDisk announced a definitive agreement to acquire Fusion-io (NYSE:FIO), a leading developer of flash-based PCIe hardware and software solutions that enhance application performance in enterprise and hyperscale datacenters. The acquisition will be an all-cash transaction valued at approximately $1.1 billion, net of cash assumed.

Since FIO's products are complementary to those of SanDisk, I believe that the acquisition will contribute to SanDisk's growth. According to SanDisk, Fusion-io will accelerate SNDK's efforts to enable the flash-transformed data center, helping companies better manage increasingly heavy data workloads at a lower total cost of ownership.

SanDisk will benefit from favorable market conditions for the NAND memories for the long term. According to TechNavio's analysts' forecast, the Global Mobile NAND Flash Memory market is expected to grow at a CAGR of 18.8 percent over the period 2013-2018. One of the key factors contributing to this market growth is the high demand for smartphones across the globe. TechNavio is a leading technology research and advisory company. In addition, continued growth in flash demand from cloud-service data farms and ongoing transition away from HDDs and toward SSDs in client PC and server markets will contribute to the growth in the demand for NAND Flash Memory.

Conclusion

As a global leader in flash storage solutions, SanDisk will benefit from favorable market conditions for the NAND memories in the long term. SanDisk has compelling valuation metrics and strong earnings growth prospects; it has an extremely low PEG ratio of 0.77. Furthermore, SNDK's stock is ranked second among all S&P 500 tech stocks according to Portfolio123's "Balanced4" powerful ranking system. All these factors bring me to the conclusion that SNDK's stock is an excellent Buy right now.

Disclosure: The author is long SNDK. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.