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CIBC analysts Daniel Gelbtuch, Rick Schafer, Hugh Cunningham and Dan Morris sent a note to clients Thursday evening regarding the 4Q05 report by flash memory company M-Systems (FLSH), and the stock's subsequent drop (from ~$34 to ~$28.5). Key points from the CIBC note:

* We are reiterating our Sector Outperformer rating and $38 target on FLSH, following much better than expected 4Q05 results. In spite of light gross margin guidance for 1Q06, we continue to believe that M-Systems is one of the best execution and growth stories in our digital media universe.

* Pro-forma 4Q05 EPS of $0.50 on revenues of $206M, were well-above consensus of $0.43 on $156M (our est. $0.40 on $156M). Gross margins declined 350bp QoQ, due to stronger DoK sales, which carry relatively lower margins (~15-20%), and promotional MDoC G-Series pricing.

* 1Q guidance was mixed with revs of $140-170M (we were at $140M). GM is expected to decline further (yet rebound 2Q-4Q), due to recent retail price cuts and delayed component discounts, which we estimate will drag EPS to $0.22 (we were at $0.29). We adjusted our estimates accordingly.

* At 14x our new CY07 EPS estimate of $2.10, FLSH trades at a 30% discount to its peers (20.3x). In light of M-Systems' penchant for overattainment, MDoC's anticipated H-3 ramp in 4Q06, and MegaSIM's bright prospects, we would be aggressive buyers on Wednesday's weakness.

Here's the full M-Systems 4Q05 conference call transcript.

FLSH 1-yr chart:

Source: CIBC: Selloff in M-Systems Is 'Excessive' (FLSH)