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No. of Recommendations: 2
Dean -

What assumptions are you using to get a 54% PIV? I get 90%.


Discount rate: 10%
ROE: 12% (I used 3-year avg., and also subtracted $1 billion of cash from stockholders' equity, figuring a lot of that cash is not needed to operate the business. In 2007, SNDK's unadjusted ROE was 6%.)
Net income: $292 million (I use the average of their $218M of GAAP net income and $366 million FCF)
Book value per share: $22 (Yahoo)
Growth 5-year forecast: High = 14% (Yahoo consensus), Medium = 11%, Low = 7%
Growth years 6-10: 7%, 5%, 3.5%
Terminal growth begins year 11: 3% for High, Medium, and Low
Share count dilution: 1% a year (Actual 5-year CAGR is 11%, so I may be too easy on them)

Year 3 CAGR: 2%, assuming earnings multiple stays at 16x (maybe it will, maybe it won't). To earn 20% a year on your investment, pay no more than $15 a share

GAAP PIV-ER: Intrinsic value using a three-scenario (High, Medium, Low) mean regression model (growth declines 50% in year 6, then terminal at 3% in year 11) is $25. PIV is 90%, expected return is 11%. If you want a maximum PIV of 65%, pay no more than $17.

So, $15-$17 a share is your buy-around price for Sandisk, provided the financials do not worsen.

These CAGR and PIV numbers are only as good as the inputs, of course. But based upon my drive-by assessment, Sandisk isn't a great enough company (sustainable growth is an okay 12% a year) or a cheap enough stock to warrant further study.

But you know the company better, so please let me know if any of my drivers are too pessimistic.


p.s. Warren may leave you out of his will if you misspell his last name again!
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