Omrix Stops the Bleeding; Has SanDisk Started Healing?

Includes: OMRI, WDC
by: Shlomi Cohen

The soaring dollar and tumbling oil prices set us up, quite unexpectedly, in the middle of the summer vacation, with one the best weeks we've had recently, with the Russell 2000 Index rising by 2.5% over the week and the Nasdaq 100 climbing 5.5%. The experts are still divided as to what caused this, whether the dollar rose because oil prices fell, or vice versa, but this debate is of no interest to investors whose sole concern is the outcome. With oil at $115 a barrel, and the Euro dropping below $1.50/€, Wall Street put on a display of fireworks last Friday second only to the one people saw on the television screens that aired the opening ceremony of the Olympic Games in Beijing.

No one dreamed for a moment that we were in for another day of sharp gains when the session kicked off on Friday, as the quasi-governmental mortgage finance company Fannie Mae (FNM) unveiled massive losses that caught even the most pessimistic of analysts off guard. The company's share was already down during the first few minutes by 31% over its price at the start of the week, but as often happens, the collapse sparked a flurry of acquisitions that spread across the entire financial sector on the basis of the slogan "Buy on the bad news." In the end, Fannie Mae lost 23% over the week, Freddie Mac (FRE) lost 26%, while the ETF tracking the financial sector (NYSEARCA:XLF) rose 3.5% on Friday, and by 1.4% over the week.

Omrix patches its financial bleeding

Of the companies in my portfolio tracked by "Globes", Omrix Biopharmaceuticals Ltd. (OMRI) is the latest to unveil its second quarter results. The company, which develops and markets biosurgical sealants for the prevention of hemostasis in surgery, rejoined my portfolio four months ago, after it tumbled more than 40% in early March following the publication of its results for the fourth quarter of 2007.

Despite reporting strong sales growth, it nevertheless missed the earnings forecasts for it, and its share took a hammering as a result. I would say that the collapse in March was largely the outcome of the poor communications with the analysts covering Omrix, who were not advised ahead of time to lower their earnings estimates for the company, in view of the investment it is making in its plants in Israel.

Omrix's unveiling of its results for the first quarter of 2008 in early May passed  smoothly, and with the share now up by almost 60% on its March low, one can safely assume that the company, which reached its peak at $39, is gradually regaining the confidence of investors and the analysts covering it.

Part of the gain can also be attributed to the rumors circulating recently that the company could be up for sale - and the fact that it has had no full-time CFO for six months has merely added fuel to the fire. Omrix is marketing its surgical sealant product range together with healthcare giant Johnson & Johnson Inc. (NYSE:JNJ), and there have been persistent rumors on the market that Johnson & Johnson could acquire Omrix, from the day it went public more than two years ago.

Oppenheimer & Co analyst Amit Hazan has recommended Omrix at "Buy" and set a target price of $29. He correctly predicted that the second quarter would also pass off smoothly, and that Omrix would beat the consensus sales estimate.

SanDisk vs Samsung

The Nasdaq 100 may have risen 5.5% this week, but one of its 100 members, SanDisk Corporation (SNDK), rose 16%. This amounts to precious little consolation for a share which has slumped 70% since August 2007, yet the gain is nevertheless exceptional given the fact that flash prices are continuing to plummet and that the company is expected to post yet more losses in the current quarter. The only new development at SanDisk last week, was the publication by the company of its full 10Q quarterly filing, in which it reported material events that occurred either in the second quarter or afterward.

The news in this report was both good and bad. The bad news is that because SanDisk swung to a loss in the quarter, it had violated several of the minimum terms of its commitments to the banks, which financed its leasing of equipment for its flash production lines in Japan. No one is really concerned with that following SanDisk's share rise since the banks are not about to seize any of SanDisk's chip production plant and machinery. The good news is that Samsung lost its claim against SanDisk, which it took to arbitration, in which Samsung sought to be allowed to continue using m-systems patents, which SanDisk now owns.

In May 2006, then m-systems CEO Dov Moran canceled a multi-year agreement with Samsung under which the latter was to have supplied m-systems with chips in exchange for the right to use m-systems patents for an agreed rate of royalties. The state of the market then was totally different to what it is today, with an acute shortage of flash chips, and every available chip immediately snapped up by Apple Inc. (NASDAQ:AAPL) which saw rapid growth in its iPod Nano media player business.

Moran claimed that Samsung had backtracked on its agreement by preferring Apple over m-systems as a customer for its chips, despite using m-systems' patents. After it acquired m-systems, SanDisk demanded of Samsung to cease using these patents, seeing that the agreement from May 2006 had been revoked, and according to its report last week, it won the arbitration, which took place on July 24.

Samsung, for its part, has no intention of backing down and is appealing the ruling, a move that could arouse the hope among investors that ultimately, SanDisk will have a lot to offer Samsung. One may safely assume that the main agreement between the two companies, due to expire in August 2009 and which is worth hundreds of millions of dollars in royalties a year to SanDisk, will also be renewed, possibly even earlier than the market expects.

SanDisk founder and CEO Eli Harari will be speaking tomorrow at the Flash Memory Summit in Santa Clara, California, and there are those who will be hoping he announces substantial progress in the development of flash-based solid state drives [SSD] for laptops. Harari announced last month, in a conference call after the second quarter results that SanDisk was behind schedule, primarily with regard to the development of MLC controllers for these drives, an element that is vital if the company is to compete both in terms of price and performance, with the standard hard disk drives in use today.

Disclosure: None

Published originally by Globes [online], Israel business news -

© Copyright of Globes Publisher Itonut (1983) Ltd. 2006. Republished on SeekingAlpha with full permission.