SanDisk Earnings Dominate, So What Gives?

With strong growth on all fronts and beating analyst estimates, SanDisk should have seen its stock price going green. Instead, the market hesitated. Is there a reason?

Jan 27, 2014 at 5:00AM

Memory chip-maker SanDisk (NASDAQ:SNDK) reported earnings last week that largely came in ahead of analyst expectations, yet not all were impressed by the company's condition. The company delivered big headline numbers: record revenue, beautiful cash flow, widening margins, and even encouraging guidance -- so why the tepid response? Could it be that SanDisk's valuation tops that of its competitors after a yearlong, near 50% run up in stock price? Or is the market less impressed with its self-imposed earnings estimates? Let's take a closer look at the earnings report for clues about SanDisk going forward.

A leader in NAND space, SanDisk made all of the right moves in 2013 and helped drive fiscal-fourth-quarter revenue to $1.73 billion -- a gain of 12% over the prior year, 6% sequentially, and ahead of analyst estimates of $1.71 billion. For the full year, the company hit a record annual-sales figure of $6.17 billion -- 22% higher than 2012's revenue.

Nearly every part of the company performed strongly, with SanDisk SSD business delivering a record quarter and representing 19% of total sales in the quarter. Cash flow from operations, as mentioned above, looked delectable at $617 million for the quarter, and $1.86 billion for the year. Both were company records.

On the bottom line, the company hauled in an adjusted $390 million in its fourth quarter, or $1.71 per share. Last year's number was $1.05 per share, while the previous quarter showed $1.53 per share. Analysts were expecting $1.58 per share.

Investors couldn't have asked for a much better quarter, so what gives?

Going forward, SanDisk's growth will have to be pure, organic sales growth, which may have frightened some investors. The company has done a great job of boosting margins and positioning the company as a major player in the SSD space, but much of its lever-pulling options have now been played. Without a big-time boost in demand, the company won't be showing the strong growth it has in the past year.

Coupled with a relatively rich stock price when compared to other industry giants Western Digital and Seagate, and the market's muted reaction is somewhat understandable. Western Digital still trades at under 10 times forward earnings, while Seagate is slightly cheaper at 9.67 times. SanDisk trades at 11.51 times.

All three companies are relatively cheaply valued, especially when compared to peers in the tech space, but fluctuating prices for storage products (and thus, less predictable earnings) and the decline of traditional hard drives have held these valuations lower for some time. The greatest asset of any of the three companies is the tremendous cash flow. And while SanDisk is doing an outstanding job at generating said cash, it isn't blowing the other two out of the water. The premium valuation is therefore unattractive, by no fault of the company.

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