SanDisk Earnings Preview: Margin Recovery?

Jan.16.07 | About: Western Digital (WDC)

Several firms are commenting on Sandisk (NASDAQ:SNDK) this AM:

- UBS expects SanDisk to meet or slightly exceed their December quarter revenue expectations for roughly $980 million (+30.4% q/q, + 30.5% y/y) and guide down hard seasonally in the range of 25% q/q. Although a string of pre-announcements and negative reports from IC vendors exposed to the wireless handset end market has us modestly concerned, the firm believes that the adoption of NAND into handsets is following its own strong secular adoption curve and that this area should drive ongoing performance despite a still weak pricing environment. The company should also benefit in 1H07 from higher royalty payments for Samsung as its MLC production increased to 70% of output in 4Q06 from 40% in 3Q06. Unfortunately for the company, industry oversupply relative to demand appears unavoidable to them into the seasonally weaker 1H07 timeframe, and they would expect ongoing weakness in NAND ASPs to weigh on sentiment when reporting season concludes.

- Citigroup notes that looking back, they think SNDK had a solid 4Q06. However, looking ahead they are cautious on the shares for four reasons: 1) NAND's 1H07 fundamentals appear challenging, confirmed by Samsungs -30% 1Q07 price guidance, 2) Street 07 royalty rev ests (most NOT calculated bottoms-up) appear a stretch, 3) SNDK's new pdcts at CES impressed but appear gross margin dilutive, risking a negative target reset at the 2/26 analyst day, 4) Price elasticity of demand for traditional cards and USB drives, decelerated in 06, compounding 07 rev growth and margin risks.

SanDisk is a classic second-half trade given its extensive consumer exposure, enjoying secular tailwinds in applications such as handset cards and its new "View" video display product.

- JP Morgan notes they were encouraged by SanDisk's CES product line-up, which should fuel growth in '07. Subsequent to CES, Samsung's 4Q results and guidance underscore Sandisk's challenges, but they believe 2H07 could see a grinding recovery in margins. 2007 consensus EPS is still steep and short-term risks abound, but post 4Q earnings (01/30) SNDK stock could get interesting.

Notablecalls: Nothing positive here on SNDK. Would not be surprised to see weakness in the stock heading into earnings.

SNDK 1-yr chart:

sndk charrt