Wednesday, May 14, 2014

Price Target raised on SanDisk Corporation

SanDisk Corporation surpassed our price target of $90.60 per share on Monday, May 13th. Multiple expansion and great earnings for 2014 Q1 sent the stock up over 20% since we took a position in the company. Although the stock is at all time highs we believe that there is more upside to come and the growth story for NAND flash is still too compelling for us to exit our position. Our updated price target is $101.04 per share for 2014. Our Revenue forecasts are at the high end of the company's guidance for 2014 and our margin forecasts fall in the middle of the guidance range. We anticipate continued strong earnings growth going forward. Our 2014 Q2 EPS estimate is 1.48 dollars per share and consensus is around $1.38 per share according to Factset. In other words we think that the company is positioned for another earnings beat and may even surpass our estimates. Strong revenue growth from SSDs and embedded chips will positively impact margins along with manufacturing improvements. Cost per Gigabyte was down 23% YoY and more cost reductions will result from manufacturing facility upgrades. We have also been more than impressed with the fact that the company showed significant earnings growth and margin improvements during NAND price declines on both the spot and contract markets. Our investment thesis is still more than intact and just beginning to unfold. We anticipate SSD demand, decelerated decline in NAND prices, and stronger than expected demand for mobile devices, especially in China, will push the stock up further in the short term.

We believe the memory space is one of the best brackets of technology to be in right now and SanDisk will continue to reap the benefits of the its cost and pricing advantages in 2D NAND for the remainder of 2014 and into 2015. We are very excited to see how the company will perform with stabilizing NAND prices and worldwide increases in demand for the technology in 2014/2015. We believe that the premium on the company's multiples compared to 5 year averages is justified and that multiples will remain around or slightly below these levels for at least the next quarter or so. This is based on above average market conditions for NAND flash, high revenue and earnings growth, and record gross margins. Comparable valuation was composed using an even blend between average Price to Earnings, EV to EBIT, EV to EBITDA, and Price to Book multiples among firms in the NAND flash, hard-drive, and semiconductor space. DCF analysis and historical multiple analysis were also utilized. Many analysts began taking notice in this company's strong position for success and growth following our decision to buy the company and many price target upgrades have been issued by competing analysts. A growing amount of price targets now lie above the $100 dollar per share level. If the company continues to beat our estimates we will keep the stock. Our main focus will be 3D NAND manufacturing updates among competitors, especially if we end up deciding to hold our position into 2015.

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