Citigroup reiterated Buy on SanDisk (SNDK) after comments about weak NAND pricing at a conference yesterday from CEO Eli Harari whacked stock 7.5%. Citi thinks fundamental metrics remain solid and that the pullback is buying opportunity. Target remains $35.
Cautious Conference Comments — The typically upbeat Harari was noticeably
restrained, pointing to: 1) April softness in the US (35% of sls) consistent with 1Q08 sales activity, 2) a challenging macro backdrop (consumer spending risks high given oil prices), 3) excess competitor 1Q08 inventory impacting 2Q08 retail pricing, and 4) disappointing recent product initiatives (i. e. Gruvi; MLC SSD timeline unchgd for 2009). That said, he indicated Europe remains strong (44% of sls), and left OEM sales un-addressed (all geos; 42% of sls).
But Sell Through Reality Check Not So Bad — Understandably we braced for weak April US retail sell through data (cards+drives+MP3 players) in the afternoon’s NPD release. However, we found SNDK bit growth was just 300 bps below seasonal (helped by easy comp) while ASPs were actually 300 bps better than seasonal. Separately, we confirmed with SNDK that its Europe and Asia market share trends are firm, the OEM biz solid. We conclude SNDK is likely working to keep Street expectations in check, in particular as: 1) much of the mum’s/Prom’s/Dad’s/Grads selling season lies ahead, and 2) some competitors have recently raised 2Q GM ests (2Q08 to be the trough). Overall, we are comfortable with our 2Q08, 3Q08 and 2008 ests.
Constructive On 2H08 NAND Fundamentals — While end demand risks persist, the body of evidence we see continues to point toward steadily firming fundamentals into and through 3Q08...
Positive EPS Revision Catalysts, favourable Risk Reward — While SNDK shares have moved strongly off the year’s lows as pricing has firmed, the Monday give-back leaves the shares down 9% YTD and 50% below 52-wk highs. We think positive EPS revision catalysts remain in play in July through October and on a target of $35, but with upside to $40 if multiples inflate seasonally (25x P/E during rising NAND prices) vs downside risk of $25 (15x CIR ests), we are buyers of SNDK stock and re-iterate target price of $35.