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I'm cross posting this here as from a quick IETC perspective SNDK looks great and I'm interested in peoples opinions.

SNDK has fallen hard, perhaps too hard. Let’s take a look and see.
Key Statistics http://finance.yahoo.com/q/ks?s=SNDK
It is not often I see a tech company, even a commodity tech company selling at book. What’s up? Is SanDisk going out of business? Are they losing market share or gobs of cash? No, no and no again.

2007 Annual Report http://yahoo.brand.edgar-online.com/fetchFilingFrameset.aspx?dcn=0000950134-08-003259&Type=HTML
Q4 2007 Conference Call http://seekingalpha.com/article/62011-sandisk-q4-2007-earnings-call-transcript?page=-1


Positives
- Majority international sales, tick the exchange rate bonus box.
- PIV of 54%
- A wonky but definite EPC staircase, based on Sand’s IETC spreadsheet.
- Excellent reward to risk profile. As SNDK are trading at close to book, 1.02, and with a price to tangible book of 1.33 downside is limited. $20 upside to IV with $3 downside taking SNDK below book and a drop of $5.50 with see SNDK below tangible book.
- Bad news is already priced. Any misses should have minimal impact while good results should result in good gains. According to my records in the 24 quarters since 2002, SNDK have beaten estimates 23 times.
- Short interest has been falling, currently 6%
- Industry leader investing almost 11% of sales in R&D

Cheers
Dean

Notes:
- They may have some ARS exposure in their investments, but I can find no quantified amount. F-9 on annual report. On page F-12 they breakdown the amounts, main investments in municipal notes and bonds.
- Lousy ROE, 4.5
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As Hewitt had a slide on grammar in his CGI presentation I feel compelled to note that it is people’s opinions I am interested in.

Hey at least I said
A wonky but definite EPC staircase, based on Sand’s IETC spreadsheet.
instead of
Based on Sand’s IETC spreadsheet, I see a wonky but definite EPC staircase. :-)

Best
Dean
Who now laughs every time he sees Buffet, which seems to be at least half the time.
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Sorry all I know you probably came here all excited about three new posts, but I just thought should it be peoples’ opinions? That’ll learn me real good to bother correcting my grammar.
It is almost 1.30am here, it’s hot, I’m tired and possibly delirious.

Over and OUT
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No. of Recommendations: 2
Dean -

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

Drivers:

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.


Hewitt


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

Have you changed any of the inputs used to determine PIV-ER since you first presented it here? For example, I notice you mention ROE as a driver, but I don't recall that being part of the original calculation. Also, I see you list total earnings and share dilution, whereas I thought you began with EPS, then applied analyst growth estimates to that number (which would assume that the analyst's growth estimates are for EPS and thus have taken share dilution into account in calculating EPS growth).

If you could share the inputs and how they are used once more, I'd greatly appreciate it. As it is, I get almost the exact result Dean got for SNDK - but then again, we collaborated on the spreadsheet used to calculate PIV-ER, so it should come as no surprise that we get similar results.

Thanks,
Paul
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No. of Recommendations: 2
As a follow-up, here are the inputs I used (excuse the false precision on some of the numbers, but I use web queries to pull the numbers directly off Yahoo and MSN, which are then fed directly into the calculation):

EPS: $0.93
Analyst growth:
Years 1-5: 14.3% / 10.7% / 7.14% (High/Medium/Low)
Years 6-10: 7.14% / 5.35% / 3.57% (High/Medium/Low)
Terminal growth: 3%

Here is how it plays out (copied from Excel):

Ticker Symbol: SNDK
Company name: SanDisk Corp

Current Price $23.00
Expected five year growth 14.3% (per Yahoo)
Book Value 5,008,400 in thousands (per MSN)
TTM EPS 0.93 (diluted EPS per MSN)
Shares Outstanding: 224,261 in thousands (per MSN)
Discount Rate 10.0%
Book Value/Share $22.33

Results (with 10% discount rate)

Present Weight Weighted
Value Factor Value
---------------------------------------------------------
High Intrinsic Value: $24.94 25% $6.24
Mid Intrinsic Value: $20.35 35% $7.12
Low Intrinsic Value: $16.58 40% $6.63
---------------------------------------------------------
Total weighted intrinsic value: $19.99
Book Value/Share: + $22.33
---------------------------------------------------------
Weighted Intrinsic Value + BV: = $42.32

Intrinsic Value $42.32
Price to Intrinsic Value (PIV) 54%
Expected Return (ER) 84%


The spreadsheet calculates a present value for future EPS for high growth, medium growth and low growth, then weights them at 25%, 35% and 40% respectively. We then add BV/share back in.

What are we missing, or what are you doing differently? Any insight will be appreciated.

Thanks again,
Paul
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No. of Recommendations: 3
Paul, Dean -

Good catch. I recently amended my PIV-ER formula. I no longer use book value, as it includes intangibles and other non-operating assets that can make a decent business more attractive than is warranted. Now I just use cash and debt. So after estimating a firm's operating value, I add cash and then subtract debt.

The reason for using cash and debt vs. book value is to make PIV-ER more restrictive. I have so many companies to study, so I need to weed out the marginal prospects in my first 10-15 minutes of work.

I will miss some great stocks, including perhaps SNDK. Under the cash/debt approach, a company like SNDK that has lots of book value ($22 per share) is somewhat penalized. But as you may recall from my book, "one pearl is better than a whole necklace of potatoes." I want pearls.

Try re-running your numbers with $1.84 billion of cash and $1.23 billion of debt and let me know what you get. You may decide to keep book value, which I admit is more accommodating than my cash/debt approach.


Hewitt
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Hi Hewitt,

Plugging in the $610M net cash returns an intrinsic value of just under $23/share - much closer to your number. Guess it's time to re-jigger my spreadsheet.

Thanks,

Paul
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Hi Hewitt and Paul
Wow. Let me say that again WOW. You guys are the best.

I agree that book value often overstates the underlying value. I generally prefer to use book minus goodwill and intangibles than cash-debt. SanDisk is a great example why as they have Long Term Investments of $1,060,393k, which I do not think is fair to ignore. To complicate things SanDisk may also be a good example why book minus goodwill isn’t so good, as they have “Notes receivable and investments in flash ventures with Toshiba” of $1,108,905k, which are not available for sale and so maybe should be excluded.

Cash + ST + LT - Debt = $7.45 per share
Using all same inputs as Paul listed IV then goes to $27, boohoohoo I liked my figure better.

I don’t wish to talk anyone into an investment, as if I could, but for my own sake I will address your inputs Hewitt’s. That’ll have to wait until Monday, unless I can sneak in some computer time before then.

Once again thanks for the inputs Hewitt and Paul.

Hope you have a great weekend.
Dean
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At least one insurance company run by people that I respect, White Mountains, touts tangible book value as a non-GAAP but important method of measuring the current value of the company. In fact, that is the number that WTM's posts on their website each earning release (not earnings, ROE etc).

I like Hewitt's point that one is looking for only the very best value -so we are looking for reasons to NOT further evaluate a company. We have the entire universe of stocks. Our viewpoint distinctly differs in this regard to a banker or venture capitalist reviewing an application or presentation - the decision must be made on risk and return for that particular company.

While leverage can increase rate of return, all other things being equal, we'd rather have a company with no debt, since the type of debt and debt covenants immensely complicate assessing risk.

Rog
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No. of Recommendations: 2
Some more thoughts on SanDisk

Dilution
• November 19, 2006, closed acquisition of msystems, an Israeli-based semiconductor company with a broad embedded NAND product portfolio, deep firmware expertise, and extensive OEM relationships. SanDisk issued approximately 29 million shares
• On January 13, 2006, we completed the acquisition of Matrix Semiconductor, Inc. Issued 3,722,591 shares
EOY       2007       2006       2005        2004      2003
Basic 227,744 198,929 183,008 164,065 144,781
Diluted 235,857 207,451 193,016 188,837 171,616
So net of those two purchases from 2004 to 2007 basic shares increased at a CAGR of 5.9%, while diluted increased 2.4%.

http://www.sandisk.com/Corporate/PressRoom/PressReleases/PressRelease.aspx?ID=4088
SanDisk repurchased 7.5 million shares during 2007 under a previously announced $300 million share repurchase plan to reduce the level of stockholder dilution caused by issuance of employee equity incentive awards.
These shares purchases look like an extremely poor investment at this stage, with much of the repurchases done at over $40. I also intensely dislike ESOs and using shareholders funds to reduce the effect on dilution is not a good use of funds. SanDisk appear overly generous with their options.

Without digging deeper a 5% dilution would appear to be appropriate. For young tech companies I generally use 5% and for more mature tech companies 3%.

ROE
Using the three year average is an excellent idea. Now I have to figure out an easy way of getting that. S&P reports have ROE for past ten years, but they seem slow to update the data, as for SNDK they still don’t have the 2007 data.
EOY       2006    2005    2004    2003
ROE(%) 5.46 12.73 11.92 8.36
As for backing out cash to derive at adjusted ROE, I need to think about that some more. My initial view is that management have chosen to hold cash for some reason and as there is a risk of them wasting this cash they shouldn’t receive any benefit (adjusted ROE) for holding cash. Conversely, earning should probably be adjusted down by interest received, to adjust for risk of management wasting the cash.

http://ogres-crypt.com/php/advfn-financials.php?sym=SNDK&per=a provides normalised ROE, which is different from S&P.

Maybe as a short cut I could use Reuters as they provide TTM and a five year average ROE of 4.49 and 9.15 respectively. http://stocks.us.reuters.com/stocks/ratios.asp?rpc=66&symbol=SNDK

Falling ASP
“from 2005 to 2006, we increased the number of megabytes sold by 221% in large measure due to a decrease of 58% in our average selling price per megabyte over the same period”
That comment is the nub of SanDisk and similar percentages can be found in all their annual reports. I ignore the falling ASP and focus on the revenue and gross margins, see below.

Earnings Multiples
assuming earnings multiple stays at 16x (maybe it will, maybe it won't)
I work under the assumption of it won’t. The short term fluctuations in share prices are best explained by investor sentiment and have little to do with earnings. In recent years the SNDK share price has fluctuated around 50% a quarter and over 100% annually. For example the average quarterly fluctuation in 2006 was 50% with a yearly fluctuation of 114%. Despite the large drop in share price in Q4 of 2007, prices were more stable in 2007 with a 36% quarterly fluctuation and 80% yearly fluctuation.

One of the big questions I ask prior to an investment is where do I think the share price is now within its likely range for the next quarter and year. For a quick look at this I use Big Charts and BMW charts and if I want a more accurate view I use a spreadsheet which Bakuvdanet wrote. All of those strongly suggest to me that SNDK is much closer to the bottom of its trading range for the next quarter and this year. While in stable large industrials the weighing machine and a long term view are appropriate I have found that in technological it is as, if not, more important to focus on the voting machine.

Margins
                       2007     2006     2005     2004  
Product gross margins 21.8% 31.0% 35.5% 31.9%
Total gross margins 30.9% 38.0% 42.2% 38.6%
At first look gross margins have fallen significantly in 2007. However, a quarterly view shows a different story. GMs took a massive hit in Q1 and have been improving since. The Q1 hit was primarily due to falling ASP that were not offset by lowered cost of production. With restructuring and the implementation of 56-nanometer they have turned this around. They are now transitioning to 43-nanometer technology.
This constant need to upgrade is one of the big down sides of investing in semi companies and another reason why I am always quick to sell as in the long term I think they consume to much capital for the returns they will provide.

Other Stuff
Maybe later, other things to do now.

Reference:
• 2006 Annual Report http://yahoo.brand.edgar-online.com/fetchFilingFrameset.aspx?dcn=0000891618-07-000116&Type=HTML
• 2005 Annual Report http://yahoo.brand.edgar-online.com/fetchFilingFrameset.aspx?FilingID=4278938&Type=HTML
• 8K on purchase of msystems http://yahoo.brand.edgar-online.com/fetchFilingFrameset.aspx?FilingID=4787377&Type=HTML
• 8K on purchase of Matrix http://yahoo.brand.edgar-online.com/fetchFilingFrameset.aspx?FilingID=4140600&Type=HTML
• Article on purchase of Matrix http://www.internetnews.com/bus-news/article.php/3558381
• 2007 Annual Report http://yahoo.brand.edgar-online.com/fetchFilingFrameset.aspx?dcn=0000950134-08-003259&Type=HTML
• Q4 2007 Conference Call http://seekingalpha.com/article/62011-sandisk-q4-2007-earnings-call-transcript?page=-1
• Good presentation http://library.corporate-ir.net/library/86/864/86495/items/260250/Citi_Presentation_090507.pdf
• ASP and Mbs http://media.corporate-ir.net/media_files/irol/86/86495/QtrlyMetricsforweb.pdf

Any thoughts are of course most welcome.

Cheers
Dean
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