A Gamble On SANDISK Stock Options

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Jan 30 2007
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Flash memory maker SanDisk Corp. (Nasdaq: SNDK, stock) is set to announce its’ fourth-quarter earnings today, Tuesday Jan-30-2007, after the normal stock market hour. SanDisk Corp. obtained approval from M-Systems Flash Disk Pioneers Ltd. shareholders in November-2006 to go ahead with its $1.56 billion acquisition of the Israeli flash memory maker. Under the deal, announced in July, M-Systems was valued at $36 per share.
The company said in December it received approval from the Chinese government to build a test manufacturing and captive assembly facility near Shanghai, in Zizhu Science Park.
Analysts polled by Thomson Financial expect SanDisk to earn, on average, 75 cents per share on $984.4 million in revenue. The company warned in October that flash memory prices could drop 15 to 20 percent sequentially during the fourth quarter.
Despite pricing declines during the quarter, Pacific Growth Equities’ Satya Chillara thinks SanDisk may meet or beat Wall Street expectations. Chillara has a “Buy” rating on the stock. Citigroup (NYSE: C, stock) analyst Craig Ellis, who has a “Hold” rating, said he expects SanDisk to post a “solid” fourth quarter “fueled by robust handset card demand” but could cut 2007 guidance due to soft prices, royalty payments, and competitive pressure from Micron Technology Inc. However, Bear Stearns analyst Gurinder Kalra thinks bearish future expectations are priced in the stock.
Rating Indicators for SNDK:
  • Wall Street consensus : 0.75
  • StockScouter rating : 10 / 10
  • Whisper Number for this stock : 0.82
  • Schaeffer rating for this stock : 3 / 10
  • Power Rating : 4 / 10
  • Insider Trading (last 52 weeks) : ($97.91M)
  • Zacks Analysts Rating: Hold
  • Option Trading: Apr 2007 40 Call
  • Implied Volatility (IV) for Mar 2007 $40 Strike : 50.77%

Sales, Income & Growth – For the past 12-months, SanDisk registered $2.84 Billion sales from the industry’s $3.29 Billion. Income amounted to $367.95 Million from the industry’s $282.25 Million. While SanDisk 12-months sales growth is at 34.6%, the income growth is in the red of -7.30%.

Profitability & Financial Health – For the past 12-months, net profit margin is in the region of 12.9%. SanDisk has a debt/equity ratio of 0.35 compare to industry’s ratio of 0.25

Stock Resistance & Support Level – The resistance is at 44.03 (50-day moving average) while the first level support is at 37.34 (52-week low).

Risks – The price-to-earnings multiple is close to the average for all stocks within the same sector. The IV is rather high for Mar 2007 $40 Strike which is at 50.77%.

Shares of SanDisk, which have traded between $37.34 and $72.36 over the last year, fell roughly 20 percent during the quarter to a Dec. 29 close of $43.03 on the Nasdaq. The stock took the biggest one-day hit during the quarter on Oct. 20, when it fell from $61.73 to $49.15 after the company posted third-quarter results.

The risk of investing this stock is quite high even though the shares are under heavy accumulation by financial institutions. The high IV compounded the risk. SanDisk stock needs an excellent result and upside guidance for a huge-gap-up in order to make money. But I’ll play on contrarian – I’ll bet on Option Call instead of Put due to the fact this stock was being punished for the last 3 months since its’ earning announcement. With its’ current price of $42.20 not too far away from its’ 52-week support at $37.34, I figure the stock price have absorbed all the negative considerations listed above.

In the meantime, I’m still researching Websense Inc. (Nasdaq: WBSN, stock) of which its’ Feb 2007 $22.50 Strike have been bid-up today. The Estee Lauder Companies Inc. (NYSE: EL, stock), manufacturer and marketer of skincare, makeup, fragrance and hair care products looks quite promising as well – will research further on this stock which is expected to announce its’ earning tomorrow, Wednesday,
Jan-31-2007 before opening bell.

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