SanDisk Corporation (NASDAQ: SNDK) is set to report earnings Wednesday after the close of trading. Bank of America Merrill Lynch has issued an odd report right before the earnings. The analyst team led by Simon Dong-je Woo and Jennifer Kim has not made a stock upgrade per se, but active traders might now be anticipating that BofA knows something positive about the earnings calendar for SanDisk. It is not just that BofA is reiterating its Buy rating, but the big point is that the firm is calling for SanDisk to beat earnings estimates and it showed that there could be upside risk to its $66 price target.
We would note to readers that SanDisk was included as one of eight stocks projected to beat earnings estimates just last week by the firm.
The first thing we would point out is that SanDisk shares are down 5% at $54.55 in very active pre-earnings trading at mid-day. Today's call flies right in the face of real weakness in the stock. The market is also weak and the chip sector is weak as well. BofA is saying that this indicates a mid to up-cycle earnings and the firm is targeting gross margins of 43% and operating margin of 23% along with $0.85 in earnings per share. The firm shows that the consensus estimates are 39% gross margin, 20% operating margin, $1.3 billion in sales, and $0.63 in GAAP earnings per share. The Thomson Reuters consensus shows a consensus of $0.77 EPS.
Today's analyst call for real upside is due to average selling prices with spot NAND prices above seasonality. Chip supply constraints, low capital spending, and new demand were all cited for solid chip pricing momentum so far in 2013. The team said,
Our estimates are already above consensus but we see even further upside potential to our estimates and consequently, there could be upside risk to our price target of $66. Key data from first quarter results average selling price is the biggest swing factor determining quarterly earnings." We would point out that the first quarter was also shown as being usually a low season compared to a fourth quarter peak. Perhaps even more important is that the firm pointed out that Samsung's NAND capital spending increase will not be a big threat as Samsung may accelerate the ramp-up of its new China plant due to better NAND pricing.
While BofA Merrill Lynch may have some keen insight here, we would be quick to point out a couple of issues which support and also go against this upside call in SanDisk. This stock is highly volatile around earnings, and its stick price was only about $1 short of a 52-week high as recently as yesterday. This is also at a time when the stock price is at a 5-year high while other chip companies have been suffering.
The chart is trying to signal a breakout pattern, although the recent pullback might bring some question there. The drop in SanDisk is also on a day where the DJIA is down 1.2% or 169 points and the NASDAQ is down even more by 2.2% or 72 points.
Lastly, the consensus price target from Thomson Reuters on SanDisk's stock is $58.78, while BofA's $66 target compares to a street-high target of $70 on the stock. We would pay attention to SanDisk's guidance more than the past earnings report because that is what has often generated the monumental buzz for traders in past years.
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