Credit Suisse Downgrades SanDisk, Cites 'Execution Uncertainty'

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In a report published Thursday, Credit Suisse analysts downgraded the rating for SanDisk Corporation SNDK from Outperform to Neutral, while reducing the price target from $75 to $65. The company's strategic value is not strong enough to offset the uncertainties surrounding strategy and execution, the analysts said.

SanDisk has reported its C1Q revenue and EPS largely in-line with its negative preannouncement, while guiding to C2Q and CY15 revenue and EPS well below expectations. The EPS estimates for CY15 and CY16 have been reduced from $4.00 to $2.83 and from $5.08 to $4.58, respectively.

The analysts have a positive view on the memory sector - "consolidation, slowing Moore’s Law, capital discipline, new applications/robust demand" as well as on MU in the US and Toshiba, Samsung and Hynix in Asia. "Unfortunately, we see multiple SNDK specific issues that need to be addressed beyond the announced reorg/restructuring," the analysts added.

In the report Credit Suisse highlighted four "enduring issues" associated with SanDisk:

  1. Enterprise strategy appears "overly optimistic"
  2. 3D NAND migration creates uncertainty around relative cost structures and industry bit growth
  3. Structural slowdown in the high margin retail business
  4. Need for SanDisk to renegotiate licensing revenue in August 2016 (this revenue stream accounts for 40 percent of CY15 EPS).

"NAND is a valuable commodity and SNDK is a valuable asset with a long track record of out-executing. Both have strategic significance to the technology ecosystem…which should provide some valuation support as M&A is unlikely to occur below 1x EV to replacement value - a stock price of at least $70. Unfortunately M&A potential alone is not sufficient to maintain an OP rating and excluding M&A we see fair value at $6 and trough value of $42," the report added.

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Posted In: Analyst ColorDowngradesPrice TargetAnalyst RatingsCredit Suisse
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