We are upgrading SanDisk Corp. (SNDK) to Outperform from Neutral based on strong fundamentals and consistent financial performance over the last couple of quarters.
SanDisk has taken various steps to cut costs and is witnessing substantial margin improvements through restructuring efforts. In the fourth quarter and fiscal year 2009, the company posted better-than-expected results and exceeded management guidance while reducing its cost of production significantly.
Sandisk’s fourth quarter earnings of $1.18 per share exceeded the Zacks Consensus Estimate by 56 cents. Total revenue for the quarter was $1.24 billion, up 44.0% on a year-over-year basis and up 33.0% on a sequential basis. Revenue for the quarter exceeded the company’s expectation of $1.1 billion and $1.2 billion, due to substantial increase in Product revenue, although decline in License & Royalty revenue reduced further growth opportunity.
This apart, the company’s results were positively impacted by higher OEM revenues from new channels, which may be expected to continue in the next quarter. Moreover, retail sales were also strong in the quarter and witnessed growth across all end markets.
The company has been able to reduce the cost of product revenue for the fiscal year ended 2009 to $2.28 billion from $3.29 billion in the year-ago period. Consequently, gross margin for fiscal year 2009 increased to 36.0% from 1.9% reported in 2008. We believe that the company will be able to sustain the growth in gross margin and reduce cost of product revenue, as management is focusing on improving the utilization rate.
The company is cash rich and is using its substantial cash position to reduce its long term debt obligations. SanDisk is surely showing signs of trend reversal. We are optimistic about the long term growth story of SanDisk and upgrade the stock to Outperform.
Our three-month target price is $37.00, representing a P/E multiple of approximately 14.2x our 2010 earning per share estimate of $2.61, which is lower than the S&P 500.
Read the full analyst report on “SNDK”
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