Micron-Lexar Deal Spells Trouble For SanDisk, But What About M-Systems? (LEXR, MU, SNDK, FLSH)

Includes: FLSH, LEXR, MU, WDC
by: SA Editors

In this weekend's Barron's (sub. req.), Bill Alpert opines that Micron's (MU) acquisition of Lexar (LEXR) spells trouble for flash memory retail leader SanDisk (SNDK). Here are Alpert's three main points:

● Chips from the Micron-Intel joint venture will reduce Lexar's raw NAND costs and allay any fears of supply constraint -- a constant challenge in this field.

● Micron's low gross margins vs. SanDisk's (20 vs. 35.5) give Micron leverage to pressure SanDisk while still growing market share.

● Even after its recent stock price fall, SanDisk is richly valued -- at 22x 2006 earnings, or 26x if one considers stock options.

It's reasonable to extend Alpert's first two points to other flash memory producers as well -- in particular, M-Systems (FLSH), which has struggled both to remain competitive on gross margins and to secure sufficient NAND supply.

But here's where the development might actually work in M-Systems' favor: Intel/Micron's raw NAND competitors Samsung and Hynix (M-Systems suppliers) might need to lower their pricing to compete with the synergies at Intel/Micron/Lexar. That would be good news on the supply chain for FLSH.

SNDK 1-yr chart: