Is SanDisk a Risky Investment?

With shares of SanDisk Corp. (NASDAQ:SNDK) trading at around $52.31, is SNDK an OUTPERFORM, WAIT AND SEE or STAY AWAY? Let’s analyze the stock with the relevant sections of our CHEAT SHEET investing framework:

C = Catalyst for the Stock’s Movement

SanDisk is a global leader in flash memory storage solutions. It’s also a stock that’s admired by most analysts. However, is this adoration justifiable, or is this just a matter of everyone jumping on the bandwagon? There are several positives and negatives for SanDisk. Let’s take a look at the positives first:

  • Q1 revenue increased 11 percent year-over-year
  • Record Q1 retail revenue
  • Improved product mix
  • Favorable industry supply
  • Strong demand
  • Expanding gross margin
  • Q2 revenue expected to come in between $1.35 billion and $1.40 billion
  • FY2013 revenue expected to come in between $5.6 billion and $5.75 billion
  • Increased cash position and cash flow
  • Average analysts target price of $58.78
  • Strong debt management
  • Low-cost producer
  • Strong solid state drive sales
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Negatives for SanDisk include:

  • Q1 revenue declined 13 percent on a sequential basis
  • Significant revenue setback in 2012
  • Limited increase in chip supply will curb sales growth
  • Voluntarily announced that it probably won’t be able to fill all orders this year
  • Significant setback in earnings in 2012
  • No dividend yield
  • Stock performs very poorly in bear markets

That’s a lot to digest. However, the conclusion is simple. Prior to reaching that conclusion, let’s take a look at some comparative numbers. The chart below compares fundamentals for SanDisk, Western Digital Corporation (NYSE:WDC), and Seagate Technology Public Limited Company (NASDAQ:STX). These three companies are similar in size, which gives the fundamental comparisons a lot of weight. SanDisk has a market cap of $12.70 billion, Western Digital has a market cap of $12.00 billion, and Seagate has a market cap of $12.31 billion.

SNDK

WDC

STX

Trailing   P/E

30.88

6.01

4.45

Forward   P/E

11.93

6.37

6.27

Profit   Margin

8.26%

13.31%

19.80%

ROE

5.83%

29.39%

101.19%

Operating   Cash Flow

$529.85 Million

 $4.04 Billion

 $4.36 Billion

Dividend   Yield

N/A

1.90%

4.20%

Short   Position

N/A

2.80%

8.50%

 

Let’s take a look at some more important numbers prior to forming an opinion on this stock…

E = Equity to Debt Ratio Is Normal  

The debt-to-equity ratio for SanDisk is very close to the industry average of 0.20.

Debt-To-Equity

Cash

Long-Term Debt

SNDK

0.23

$2.88 Billion

$1.70 Billion

WDC

0.26

$3.82 Billion

$2.13 Billion

STX

0.96

$1.87 Billion

$2.82 Billion

 

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T = Technicals Are Mixed  

SanDisk has performed well over the past three years, but this month has been weak.

1 Month

Year-To-Date

1 Year

3 Year

SNDK

-5.29%

20.25%

45.67%

39.94%

WDC

1.75%

18.13%

22.70%

26.42%

STX

-1.46%

13.22%

22.99%

94.33%

 

At $52.31, SanDisk is trading below its 50-day SMA, but above its 100-day SMA and 200-day SMA.

50-Day   SMA

53.12

100-Day   SMA

49.04

200-Day   SMA

45.28

 

E = Earnings Have Suffered a Setback                

Earnings have weakened for two consecutive years. This is a rarity in today’s market. In regards to revenue, while many companies throughout the broader market have seen setbacks in 2012, many of those setbacks have been small. SanDisk’s decline in revenue is a little more worrisome.

2008

2009

2010

2011

2012

Revenue   ($)in   billions

3.35

3.57

4.83

5.66

5.05

Diluted   EPS ($)

-8.82

1.79

5.44

4.04

1.70

 

When we look at the last quarter on a year-over-year basis, we see improvements in revenue and earnings. However, revenue and earnings both declined on a sequential basis.

3/2012

6/2012

9/2012

12/2012

3/2013

Revenue   ($)in   billions

1.21

1.03

1.27

1.54

1.34

Diluted   EPS ($)

0.46

0.05

0.31

0.88

0.68

 

Now let’s take a look at the next page for the Trends and Conclusion. Is this stock an OUTPERFORM, a WAIT AND SEE, or a STAY AWAY?

T = Trends Might Support the Industry

The flash memory market is cyclical. It would be difficult to believe that there’s a lot more upside potential from here. Due to the current macroeconomic environment, customers might be cutting back on orders in the near future.

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Conclusion

SanDisk has a lot going for it, but the industry simply wouldn’t hold up well in a difficult environment. There is no sense investing in a stock where the downside potential is 50 to 65 percent and the upside potential is only 10 to 15 percent. Revenue setbacks also play a key role in this conclusion.

SanDisk is a STAY AWAY.

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Disclosure: All content posted represents my opinion and views and should never be considered professional advice. You should do your own research and consult with a professional financial advisor before making any investment decisions. I do not have a position in this stock. I am currently short technology, financials, the Russell 2000, and the euro.