SanDisk (SNDK) Pushing All the Right Buttons

“Shares of SanDisk are moving from an upgrade, up 6.25%.  There is optimism about the company’s momentum in the consumer hand-held device market.” – Bloomberg Television 7/12/2010

SanDisk (SNDK), makers of memory cards and flash memory products, is seeing its stock surge on Monday after getting an upgrade from Uche Orji and Steven Chin of UBS (UBS).  The analysts have raised SNDK to a buy from neutral and have raised their price target to $55 from $46.  As the largest maker of flash memory products, SanDisk stands to benefit greatly from the proliferation of smart phones, MP3 music players, tablet computers and other handheld devices that use such memory.  The UBS analysts are confident that concerns regarding oversupply of flash memory have been overblown because of the strong demand for handheld devices now and into the future.

For a stock that has performed as well as SanDisk has, up 58% thus far year to date, one has to wonder if the stock has already played out.  In this regard, we have to agree with the analysts at UBS in that the company continues to have substantial upside despite the recent outperformance of the stock.  According to our methodology, the stock is Undervalued and we only recently upgraded it from Fairly Valued in June.  For example, the stock currently sells for only 11.9x this year’s EPS estimate, which compares very favorably to their historically normal range of 17.8x to 41.3x over the course of its last ten years.

On a price-to-sales basis, SanDisk is less attractive, yet its valuation is still not particularly distressing.  Historically speaking, the market has been willing to pay between 1.22x and 3.54x times sales per share.  SanDisk is currently near the middle of that range at just about 2.1x.  Still, we see more upside potential for SanDisk as they are expected to grow sales further by about 10.5% in fiscal 2011.

Of course, we are concerned that margin compression in the memory products market may be unavoidable, but we tend to agree with the UBS analysts that oversupply concerns may already be priced in.  When you look at the huge popularity of consumer electronics devices that utilize these memory chips, we think continued growth is completely reasonable to expect.  Smart phones have spread rapidly in the past few years, just like MP3 players like iPods did before smart phones.  We think that eReaders and tablet computers could drive the next phase of growth in for memory chip makers.  All indications point to SanDisk being one of the leaders in providing that memory going forward.

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