Forecasting SanDisk's Financial Performance And Share Price

| About: Western Digital (WDC)
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SanDisk (SNDK) is coming off of a year of poor financial performance. But, the stock price has done very well over the last several months. The company is introducing new products and this year should be better from a financial performance perspective.

With that said, it seems as though the market priced in the better performance for this year as valuations are near peaks. That said, I expect continued strong performance this year with some potential weakness, or buying opportunities, later in the year. The share price has performed so well that it may be difficult for SanDisk to beat the already high expectations; that could provide some buying opportunities.

Consequently, a dip to the $47-$57 range would provide an excellent opportunity to get long shares of SanDisk. SanDisk remains well positioned to benefit from increasing data consumption and storage.

Recent Developments

SanDisk announced the SanDisk Extreme microSDHC and microSDXC UHS-I memory cards, which are designed for smartphones, tablets and cameras. The 64GB microSDXC UHS-I memory card is the world's fastest with up to 80MB/sec read and up to 50MB/sec write speeds.

The company also announced three USB flash drives, the SanDisk Ultra USB 3.0, Cruzer Orbit, and Cruzer Force USB flash drives. The SanDisk Ultra USB 3.0 flash drive transfers files up to four times faster than regular USB 2.0 drives. The Cruzer Orbit USB flash drive offers an easy and convenient way to store, transfer and share data in 360-degree swivel design. The Cruzer Force USB is built with a durable metal casing.

SanDisk announced an agreement to acquire SMART Storage Systems, a developer of enterprise solid state drives based on the SATA and SAS storage protocols. SanDisk is paying about $307 to acquire SMART Storage Systems. The deal is expected to close in August, 2013. This acquisition enables SanDisk to address a $1.6 billion market opportunity in enterprise SATA products, and complements SanDisk's SAS product portfolio. The impact of this acquisition is expected to be slightly dilutive to SanDisk's non-GAAP earnings per share in the second half of 2013 and become accretive to earnings in 2014.

SanDisk expanded its solid state drive [SSD] portfolio with the addition of three new models (SanDisk Extreme II SSD, SanDisk U110 SSD, and SanDisk X110 SSD). The SanDisk Extreme II SSD improves the performance of notebook computers and desktops. The other two SSDs improve the performance of ultra-thin notebooks and tablets.

None of the recent developments is too exciting; they are product upgrades.

Segment Analysis

There are two main sources of revenue: product revenue, and license and royalty revenue. There is also revenue that comes from commercial and revenue from retail. I provide forecasts for all four of these divisions.

I'm forecasting revenue from commercial to be slightly stronger than FY 2012. Revenue should be in the $2.9 billion to $3.3 billion range. Revenue in FY 2012 was $2.83 billion. Revenue in the second quarter should be between $700 million and $850 million.

Revenue from retail should increase relative to fiscal year 2012. I'm expecting revenue in the $1.85 billion to $2 billion range. Fiscal year 2012 revenue was $1.85 billion. Revenue in the second quarter should be $450 million to $550 million.

Product revenue should be in the $4.75 billion to $5.3 billion range in fiscal 2013. License and royalty revenue should be roughly flat at $374 million.

Thus, SanDisk should report a good year relative to 2012, but probably below the fiscal 2011 level.

Consolidated's Forecast & Valuations

In terms of the second quarter, I am looking for revenue in the $1.15 billion to $1.4 billion range; revenue in the second quarter of fiscal 2012 was $1.03 billion. Operating income is challenging to predict; so, I am going to use a conservative operating margin. Operating income should be in the $184 million to $280 million range. Net income should be in the $103.5 million to $168 million range.

I'm expecting consolidated revenue in the $5.12 billion to $5.67 billion range in fiscal 2013. Operating income should be in the $819 million to $1.14 billion range. Net income should be in the $461 million to $680 million range. All three measures of profitability should be above their 2012 comparisons.

The share count is trending higher; thus, the pace of earnings growth needs to outpace the pace of share count growth, which generally is happening.

SNDK S&P 500 SNDK 5Y Avg*
Price/Earnings 31.3 16.6 12.4
Price/Book 2.0 2.3 1.5
Price/Sales 2.8 1.5 1.8
Price/Cash Flow 15.6 9.9 13.2

Relative to its 5-year average, SanDisk is overvalued. The same can be said for the comparison with the S&P 500 and on a time series basis. So, SanDisk is overvalued.

The market seems to have priced in the improved prospects for SanDisk relative to the prior year.

Share Price Forecast

The uptrend lifting the share price is pretty strong. Consequently, I believe the top will be in place at roughly the $70 level. But, I will model the $63 level and the $70 level for potential entry zones. Granted, SanDisk could face a decline of primary degree.

From the $63 level, the entry range would be $47-$53.50. From the $70 level, the entry range would be $52.50-$59.50. The financial performance should act as a tailwind to valuations.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.