Susquehanna Upgrades SanDisk (SNDK) to Positive
Susquehanna upgraded SanDisk (NASDAQ: SNDK) from Neutral to Positive with a price target of $86.50.
Analyst Mehdi Hosseini commented, "We are upgrading SNDK to Positive (from Neutral) as we believe the pullback in SNDK shares (and associated widening of deal spread) has presented an attractive Long opportunity predicated on increased confidence of a WDC/SNDK deal irrespective of whether the WDC/Unis deal closes in time or not. Conversely, we argue the risk/reward on the SHORT side is not attractive and SHORT sellers should be cognizant of core earnings power as well as the increased prospects of the WDC deal getting done. Specifically, our upgrade thesis is predicated on the following factors: 1) even IF WDC's Unis deal does not close (which has been generating a lot of "noise"), a WDC deal for SNDK would value SNDK shares at a minimum of ~$78/share based on current WDC share price, 2) in fact, if the deal comes to a vote by WDC shareholders, we believe they will ratify the deal, given the strategic/financial rationale (vertical integration, IP), as well as a backdrop of a softening HDD industry which may frighten investors with the thought of being 90% exposed to HDD if the SNDK deal falls through (SSD accounts for 10% of WDC rev looking fwd), 3) a strong Dec Q, and a "not as bad as feared" Mar Q guide (when normalized for 1 less week of Revs in 1Q) could (to some extent) ease the nerves of WDC shareholders that are concerned about the competitive dynamics in the NAND industry, 4) antitrust approvals are behind us as HSR expired, and Japan and Singapore regulatory bodies have approved the deal, which brings the SNDK acquisition a step closer to completion, 5) WDC/SNDK pulled forward their anticipated deal closing to 2Q16 (from 3Q16), which we view as another reassuring sign. In this context, we believe risk/reward is attractive with 20%-33% upside to the WDC acquisition price from current levels, while we quantify a "worst case" scenario of $52, or trough P/BV of 1.8x. That said, our "worst case" downside risk is predicated on: 1) a termination of the acquisition, and 2) erosion of profitability for SNDK - both of which we view requires more of a "leap of faith", than our upside contention."
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Shares of SanDisk closed at $64.21 yesterday.