Is SanDisk a Pick?

Adetokunbo is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

SanDisk (NASDAQ: SNDK), a leader flash storage solutions, showed strong growth in its second quarter report, posting revenue that was up almost 43% on a year-over-year basis. The company’s sales were driven by the prices of chips that remained high as producers limited output increases. SanDisk’s stock rose as much as 7.3% on the news, but our focus should also be on how to trade the other memory-related companies based on SanDisk’s revised outlook.

SanDisk beat Wall Street’s revenue estimates by almost 2% to 6%. The company now expects enough demand to keep prices healthy this year. It may report sales of $5.95 billion to $6.05 billion, up from a first-quarter forecast of $5.6 billion to $5.75 billion. It trades around 5.2 times estimated 2014 earnings. It cut spending on factories as the memory-chip industry scaled back supply to halt the fall in prices.

Due to the positive sentiment expressed by the company, Needham reaffirmed its buy rating on a price target of $80.00, compared to the stock’s current price of $62.18. The overall sentiment from the hedge fund sector is also positive, with Steve Shapiro, Richard Patton, and Michael Messner appearing quite bullish, each upping stakes by 100%.

SanDisk can be considered as one of the barometers to gauge broader economic trend. The company’s ties to the memory sector make it one of the organizations that we look toward when judging how global growth will unfold. Its condition will reflect on the other memory-related companies such as Sony (NYSE: SNE), Micron (NASDAQ: MU), and Samsung (NASDAQOTH: SSNLF).

Peers

Sony needs a profitable memory market so its Memory Stick solution can reign supreme in the removable memory market. The company designs and sells electronic equipment, instruments, and devices for consumer and industrial markets worldwide.

The company posted a third quarter loss of $124 million for the fiscal year ending March 31. It cited falling sales of video game hardware for the declining figure. The company has however forecast an expected net income of $213 million for the fiscal 2013.

Much like the second quarter fund interest for SanDisk, Sony has votes of confidence, namely from Charles Davidson and Jim Simons, both increasing their stakes by 100%. However, due to its falling profits, I will wait for its next quarter report before making a pronouncement on Sony.

Micron will live on the edge of extinction if the memory market is soft. However, it  has seen improving market conditions in the sale of NAND and DRAM products.

Second quarter revenue for the last quarter was well ahead of Wall Street analysts expectations. The company reported a profit of $43 million, and got reaffirmation from analysts. Robertson Stephens upgraded the company to "strong buy" from "buy." The company’s rising trend made hedge traders such as Steven Cohen of Sac Capital Advisors and the Arrowstreet Capital team of Peter Rathjens, Bruce Clarke, and John Campbell increase their stakes by 100%.

Micron is a good investment going forward. It has been effective in creating a complete solutions portfolio in the memory sector. It allocates a significant proportion of its revenue on R&D and has positioned itself through its acquisitions. With the conclusion of the Elpida acquisition, Micron looks well-positioned to make money from its core business

Samsung needs a buoyant memory market so it can be a market transformer in the phone market, the enterprise sector, and the notebook market. SanDisk’s good outlook for the market are positive signs for Samsung. It, however, missed modest expectations for its last quarterly earnings, deepening worries that its mobile operations may have peaked.

Samsung’s debt load puts it at an advantage to its peers. It carries a debt to equity ratio of 9.59, compared with 11.02 for SanDisk, 45.15 for Micron, and 44.92 for Sony. Three of these companies trade in a wide P/E range of 7x to 45x earnings, except Micron, which did not report any figure.

Samsung is also a good investment going forward. It has the best  multiples for growth prospects among the four companies. It has little debt, plenty of free cash, and pays a handsome dividend to investors

Valuation

From a valuation standpoint, SanDisk’s PEG ratio of 0.47 is respectable given the tough nature of memory market. The company’s return on equity for the past 12 months has been 9.99%, above 4.01% for Sony and -9.18% for Micron. It is however lower than Samsung (22.15%). At a forward P/E of 11.87, shares of San Disk are cheaper than Micron (13.92) and Sony (16.44). The stock is estimated to grow by 24.43% per annum in the next five years, above 15.90% for the industry and 16.93% for the sector. Wall Street currently holds an average price target of $70.00 on SanDisk, which represents close to a 12% upside from current levels.

Conclusion

To conclude, the simple idea I'm suggesting is that you could consider the stock for the future. As investors, we understand the importance of not leaving cash idly sitting around. If you're struggling with ideas on where to put some of your investment cash in the near future, SanDisk is one company you can put on your watch list.

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Adetokunbo Abiola has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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