SanDisk: Buying on the Bad News?

Shares of flash memory maker SanDisk (SNDK) are jumping this morning, which may seem strange given that the last official word from the company, back on July 21, was an extremely nasty June quarter report that consisted of missingn estimates, pushing out production, and seeing margins brought down by inventory write-downs.

Sounds like a buy? Well, I chatted with R.W. Baird & Co. analyst Tristan Gerra this morning, who says he thinks the jump is about folks assuming the worst is in the stock. “Investors may think worst news for the year. Maybe incentive to buy on the bad news,” opines Gerra.

Specifically, SanDisk filed its actual 10Q with the SEC last night, and there are some ugly things in it, that, taken in one perspective, could make you think things can’t get any worse.

First off, there are a number of off-balance-sheet obligations that worry investors as to the ability of SanDisk to fund its business over time. Gerra notes that SanDisk has broken some covenants in leases that it takes for facilities in its flash memory joint venture with Toshiba. Gerra notes that “The leases could be called, which could trigger a call on another $484 million in leases,” obligation for SanDisk. He notes that SanDisk IR has told him that it’s “unlikely” the leases will be called. Gerra also observes that the total cash needs for SanDisk in these next two quarters are $1.8 billion, up from $753 million a year ago. Operating expense commitments “ballooned,” in Gerra’s term, six-fold last quarter. And free cash flow will go deeper into the red, Gerra estimates, in the second half, falling to negative $229 million these next two quarters from negative $220 million in the first half.

Like I said, bad news that may make some people see silver linings. Gerra is Neutral on the stock, has a $16 price target, and says he “wouldn’t be a buyer” on this bad news. He notes that people think flash memory chip prices are stabilizing this quarter, after falling torrentially the first half of this year. But Gerra’s observation is that, “contract pricing [for flash] for first half of August is pretty dismal, down double digits at a time when pricing usually picks up in August.” He thinks that “narrows the window in which flash pricing can rebound this year,” especially given that flash prices tend to go down in the fourth quarter, historically.

Nevertheless, SanDisk shares are currently up $1.10, or 7.22%, at $16.34.

Comments

[User 117175:]

Anyone watch that show 'Wall Street Warriors' on the Mojo HD channel? There were a couple of brokers who were pushing this stock hard...the show takes place around October 2007 (when all heck started breaking loose), and so with the benefit of knowing what would happen I would always grimace as these guys lined up customers and got them heavy into this stock at $40+ per share. Poor guys. Wonder what they're up to these days...

2008 Aug 07 05:28 PM

[papita:]

this message is to the author of this article. I emailed Eric this morning when I noticed the shares up substantially on pretty good volume and asked him if he knew of any reason for this. He emailed me back that there was nothing that he knew of but would pass my note on to you. I see that he did. I wanted to let you know I appreciate this article and appreciate both yours and Eric's effort. I run a small hedge fund in a small Connecticut town and thanks to both of you gentlemen for making me feel like I run a big hedge fund in Manhattan.

Sincerely,
Steve

2008 Aug 07 07:42 PM

[Paul Lopez:]

Good report. I sold out my October call spreads for a nice profit today. I opened the trade the day of the big nose dive after earnings. I'm not hanging around, it will probably retest its recent low again. People will still need memory.

2008 Aug 07 11:53 PM

[Urbane Gori...:]

I noticed that SNDK, MU, INT, AMD are all trading up this AM... Don't see any reason for it.... I like SNDK, but maybe closer to XMAS for obvious reasons.... Maybe people just want to keep their toe in the market and commodities just isn't the place right now... Kinda interested in Lenovo for their China presence....

jegan ;-)

2008 Aug 08 02:42 PM