Reading Between SanDisk's Headlines

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You can tell a lot by the headline a company chooses to put atop its earnings release. "Pie In the Sky International (Ticker: NOPE) Reports Record Earnings and a Dreamy Order Book" usually points to either great results or a stinky pile of spin control, for example. "SanDisk (Nasdaq: SNDK) Announces Second Quarter Financial Results -- Reducing Future Supply Growth and Capital Expenditures" sends a very different message.

The obvious interpretation is that this quarter was decidedly humdrum. Revenue shrank by 1% from Q2 2007 to $816 million, and the GAAP net loss of $0.30 per diluted share compares badly to last year's $0.12-per-share profit.

There was no amazing key point on which to pin a positive spin, and the company is making some changes to its business model in order to improve its financial health. SanDisk is cutting down on planned increases to its manufacturing capacity, and it wants to make sure that we see how responsible the company can be at a time of massive oversupply in the computer memory markets.

Now, if only rivals like Samsung, Micron (NYSE: MU), and Spansion (Nasdaq: SPSN) would make similar moves to bring the supply-and-demand equation back in balance, we just might consider investing in memory makers again.

Mr. Market got SanDisk's message loud and clear, chose to interpret it as a sign of weakness, and sent the company's share price tumbling by 20%. Ouch.

Of course, there's a more subtle and inspiring way to read that headline above. SanDisk's management could have put a nicer-sounding banner above this report, such as "License and royalty revenue improves 20% year over year" or "New line of solid-state drives moves the company into exciting new markets." But it didn't. The stoic choice to get the bad news out of the way speaks highly of SanDisk's top leadership. I'm more inclined to trust a company that displays uncomfortable truths in public, rather than sweeping them under the rug.

This stock has become a staggering 75% cheaper over the last year, but it still doesn't look all that cheap, because the trailing earnings are dwindling away even faster. There will be a market bottom sooner or later, where SanDisk, STEC (Nasdaq: STEC), Micron, and even Rambus (Nasdaq: RMBS) look like ridiculous value plays, but I don't think we're there yet. When that day comes, though, I'd give SanDisk and its honest management a second look.

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