Street Downgrading SanDisk After Western Digital Buyout

• SanDisk Corporation SNDK shares are down 23 percent year-to-date, despite making a recovery past the $70 mark through October.
• Morgan Stanley and B. Riley downgraded their ratings on the company, while raising their price targets.
• SanDisk has inked an agreement to sell the company to Western Digital Corp WDC for $86.50 per share.

Western Digital has agreed to acquire SanDisk for $19 billion, which will be paid in both cash and WDC stock. The deal values SanDisk at $86.50 per share.

Unusual 3Q, WD Acquisition Good For SanDisk Shareholders

Morgan Stanley’s Joseph Moore downgraded the rating on the company from Overweight to Equal-weight, while raising the price target from $75 to $86.50.

SanDisk reported “slightly unusual” quarterly results, with 49 percent sequential bit growth, offset by 22 percent decline in ASP. This is likely to trigger sustainability concerns, although these are overshadowed by Western Digital’s plans to buy the company, analyst Joseph Moore said.

SanDisk appears to be “on a path of fundamental improvement,” Moore mentioned, noting the reasons as:

1. The company has moved past the woes witnessed in early 2015
2. Its costs are reducing faster than peers
3. The company is in the process of transitioning to new 3D technology through next year.

“Still, we don't see the stock getting to the high $80s on those outcomes, so we like the proposed WD deal for SanDisk,” the analyst added.

In the report Morgan Stanley noted, “We view the decision to sell the company to Western Digital as a good outcome for shareholders.” The actual terms of the cash and stock deal would depend on whether Unisplendour's stake in Western Digital closes prior to its acquisition of SanDisk.

Close Of Western Digital Acquisition Is A Long Wait

B. Riley’s Craig A. Ellis downgraded the rating on the company to Neutral, while reducing the price target from $75 to $86.

Western Digital’s acquisition of SanDisk is expected to close in 3Q16. Analyst Craig Ellis pointed out that this represents “a relatively long wait.”

Referring to the valuation of SanDisk by the Western Digital deal, Ellis commented, “Memory should garner a discount but we thought a bid closer to a 52-week high was possible.” Despite this, the offer appears strong as compared to SanDisk’s long-term history.

While other bids are possible, they are not probable. Cost synergies of $500 million are expected in 12-18 months, which Ellis believes has 50 percent upside.

SanDisk reported its 3Q15 sales at $1.452B and EPS at $1.09, beating Street and B. Riley estimates. “Bits and ASP’s were much higher/lower than we expected, and large program timing helped at 4Q’s expense,” Ellis said. The company announced its 4Q15 guidance, with mid-points below expectations.