SanDisk: Sell-Off Continues After Dramatic Outlook

Apr.20.12 | About: Western Digital (WDC)

Shares of SanDisk Corporation (SNDK) were hammered in after hours trading after the company reported disappointing first quarter results on already lowered expectations. On top of that comes the disastrous outlook for the second quarter which sent shares 14% lower in after hours trading.

First Quarter Results

SanDisk, the flash memory storage provider reported a weak set of first quarter results. On a GAAP-adjusted basis the company reported net income of $114 million, or $0.46 per share, which is down 50% on the year. Sales fell 7% on the year to $1.21 billion, down 24% compared to the final quarter of 2011.

"Our first quarter results were adversely impacted by lower-than-expected pricing and demand weakness in certain segments and we expect similar trends in the second quarter as well," according to CEO Mehrotra.

Outlook

For the current second quarter the company expects revenues to come in between $950 million and $1.05 billion, far below consensus estimate of $1.29 billion. The revenue guidance compares to revenues of $1.37 billion which the company reported for the second quarter of 2011, indicating a year-on-year decline in revenues of 23-30%. CEO Mehrotra expects that stronger seasonal demand should lead to sequential revenue growth in the third and fourth quarter of the year.

Valuation

SanDisk ended its first quarter with roughly $5.4 billion in cash and equivalents as well as short and long term marketable securities. The company has some $2.1 billion in long term (convertible) debt outstanding, for a net cash position of some $3.3 billion. Factoring in Thursday's 14% decline in after hours trading, the company is valued at roughly $8.5 billion, or $5.2 billion for the operating assets. This values the company at 0.9 times annual revenues and roughly 5 times 2011's earnings.

The decline in first quarter profitability and the grim outlook for the second quarter indicates that the company will report a decline in annual revenues and profitability for 2012 which will drive valuation multiples upwards.

Investment Thesis

Shares have already fallen some 30% in the month of April as the company already warned for disappointing results. Thursday's miss on already lowered expectations and the bad second quarter outlook do not spell much good.

The warnings of SanDisk a couple of weeks ago came as a surprise to many amidst a booming global smartphone and tablet market which should drive up demand for SanDisk's products. Recently I already discussed the fact whether SanDisk was the victim of Apple (NASDAQ:AAPL) trying to squeeze its suppliers or whether SanDisk is missing out on the business.

Thursday's announcements make it very clear that SanDisk has problems to compete in the highly competitive global market which still sees strong growth. However SanDisk is financially very strong as the company holds large cash balances and is still profitable. Long term investors or speculators waiting for a rebound after this month's 30% sell off could pick up some shares tomorrow.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.