SanDisk Earnings Preview: Wait For The Second Half 2012 Turnaround

| About: Western Digital (WDC)

SanDisk (SNDK) reports after the bell on Thursday, July 19th, with analyst consensus looking for $0.18 in earnings per share on a little over $1 billion in revenues for year-over-year declines of 85% in earnings and a drop of 15% in revenues.

Full disclosure: SNDK was our worst performing position in the 2nd quarter, after SNDK warned during their April '12 quarterly report that too much supply and weaker demand would hurt 2nd quarter results, and the stock got crushed in response.

Gross margin has gotten ugly (somewhat due to the strong yen), hitting just 33% in q1 '12, down from 42% and 46% in mid 2011, and versus SNDK's peak gross margins of 49% - 52% historically.

This has always been the problem with SNDK, a stock we've owned off and on, and followed since 1999. A volatile revenue stream, accompanied by a high fixed cost business with plenty of operating leverage, can get ugly when conditions align against SNDK such as what happened in the first quarter, when average selling prices (ASPs) fell 22% in q1, while bit growth fell 4%.

Earnings estimates can rise and fall sharply, resulting in a volatile stock price.

The question I'm sure every reader is asking is: Have Sandisk and the semi sector bottomed? Intel's (NASDAQ:INTC) technical action today was quite good given the downside revenue guidance, as Intel rose 3% on double average volume.

Another hint around the semis was that Applied Materials (NASDAQ:AMAT) warned early last week, lowering guidance for this current quarter (AMAT reports in mid-August) and the stock didn't suffer much technical damage.

However, we'll focus on SNDK, and with book value and tangible book value being $28 and $27 respectively, in our opinion the stock is getting close to a trough valuation.

The trend in consensus earnings estimates for 2012 and 2013 have been sharply downward:

q3 '11 $4.97 and $5.50

q4 '11 $4.71 and $5.56

q1 '12 $2.02 and $3.14

q2 '12 $1.82 and $3.12 (as of Wednesday, July 18)

Readers can readily see the damage caused by the April '12 earnings and the stock price reacted accordingly. That being said, analysts are expecting almost a doubling of earnings next year (71% to be exact) so the stock could be trading now off the 2013 eps estimate.

SNDK is now a supplier of NAND flash to all smartphone makers, which means SNDK is finally into Apple as a supplier.

Using the March 31 financials, SNDK is trading at 1.25(x) enterprise value to sales, and 10(x) enterprise value to cash-flow, however, the biggest catalyst for SNDK would be an improvement in ASPs and bit growth, which would start to push earnings estimates higher.

We typically don't add to positions in front of earnings, but rather prefer to wait until we see results. Technically, SNDK is sitting on it's 200-week moving average, and is heavily oversold.

Technically, heavily oversold, near a trough valuation and now with other semi companies starting to perk up, we are waiting on the 2nd half of 2012 for SanDisk.

Disclosure: I am long SNDK.