CLSA Keeps Underperform On SanDisk, Cuts Earnings Estimates

• SanDisk Corporation (NASDAQ: SNDK) shares are up 5 percent since July 28, amid significant volatility, partly driven by a potential acquisition by Western Digital Corp (NASDAQ: WDC).
• CLSA’s Mark Heller maintained an Underperform rating for the company, with a price target of $70.
• Cost headwinds are expected to exert pressure on the company’s earnings in 2016, Heller stated.

SanDisk reported its Dec¬ember quarter results ahead of expectations, with revenue and EPS at $1.54bn and $1.26, respectively, versus the CLSA estimate of $1.44bn and $0.88. Gross margin came in at 42.7 percent, versus the CLSA estimate of 41.5 percent.

A higher mix of 15nm/X3 as well as of removable and enterprise boosted margins during the quarter, analyst Mark Heller noted. He added that SanDisk’s embedded sales, which represents 22 percent of the total, was softer than anticipated, owning to lackluster smartphone demand.

Despite beating expectations, SanDisk’s guidance for the March quarter was disappointing. The company projected 1Q16 revenue of $1.18¬1.25bn, with gross margin of 39¬42 percent, implying EPS of $0.55. This is significantly short of the consensus estimate of $0.71.

Cost reduction in 2016 is likely to be lower than that achieved in 2015. Heller enumerated the reasons as:

1. Fab 2 startup costs
2. Less cost benefit from planar migration
3. Initially higher 3D NAND costs
4. FX headwinds

The analyst added, “For 2016, our revised model contemplates 35% bit growth (no change), a 30% ASP decline (vs ¬27% prior) and 23% cost reduction (vs ¬25% prior).” The EPS estimate for 2016 and 2017 has been reduced from $3.00 to $2.30 and from $3.15 to $2.45, respectively.