EVENT:
-Company reports Q1 earnings and will offer guidance tonight after the close.
-Options Market is implying about a 6% move vs the 8 qtr average move of almost 9%.
SENTIMENT/PRICE ACTION:
-Wall street analysts are generally mixed on the name with 13 Buys, 6 Holds and 3 Sells with an average 12 month target of ~58.00.
-short interest in down over 50bps to about 3.3% of the float as of latest data reported in at March month end…
-Fidelity who has been the largest holder in SNDK for years sold 1/4 of their holding as of latest 13f filings for Q4/2010.
Price action is interesting in the name as the stock is up 43% from the Sept 1, 2010 levels, greatly outperforming the major indices including the SOX, but it is under-performing those same indices down about 1.5% ytd.
FUNDAMENTALS: Japan quake and tsunami affected some in the pc/mobile supply chain more than others. SNDK for instance gets a large amount of their wafer supply from Toshiba whose Yokkaichi, Japan production facility was offline for a bit of March and suffering other disruptions in April, most analysts believe that supply chain disruptions resulting from the Japan earthquake
will put a cap on revenue growth in 2Q, which could pressure margins. This margin pressure resulting from supply constraints could be off-set by rising Nand prices…..
-In a nut-shell, most bulls look to the continued and increasing demand for Nand for solid state drives (rather than disk drives) to go into laptops and tablets and the continued growth of smart-phones as a % of mobile phones…..
-some feel that the situation in Japan could be a near-term net positive for Nand, as the supply disruption as new supply growth is likely to slow, thus less competition and higher prices/margins.
-Bears suggest that the stocks under-performance is largely to do with fears related to companies own conservative margin guidance and the possibility that they have reached peak margin and will see continued deceleration…
-Stock is cheap at ~12x 2011 eps estimate of 4.23, but sales growth is expected to be mid to high teens this year, which if there was any margin upside to current guidance you could be paying 12x for an eps grower of high single digits with 15-20% revenue growth.
MY VIEW: Stock is up almost 6% this week in sympathy with general positive tech earnings and specifically INTC and AAPL‘s results and commentary. If you are Bullish on the name and company is able to report solid Q1 and guide higher for Q2 in light of what might be dampened expectations related to Japan, the stock could outperform the implied move in an effort to play catch up to the SOX.
-That said the stock has a history of being very volatile post earnings and any disappointment above the already dampened expectations could clearly send the stock back to the lows from last month in the low 40s.
-while the implied move looks cheap to historical, the action from AAPL and QCOM today following good reports, only up about 3% less than implied moves of about 5%) suggests that buying the move in the form of a straddle or strangle may be tough to earn this out…..and the best way to play is probably to have conviction on a direction and express that view through vertical spreads.
WAYS TO PLAY:
1. BULLISH TRADE STRUCTURE: BUY MAY CALL SPREAD RISK REVERSALS
SNDK (stock ref 49.10) SELL THE MAY 43 PUT to BUY THE MAY 52.50/55 CALL SPREAD PACKAGE COSTS ~.07
-Sell May 43 Put at .51
-Buy May 52.5 call for 1.08
-Sell May 55 call at .50
Break-Even on May Expiration:
Upside: stock is btwn 52.50 and 52.57 lose up to .07, stock btwn 52.57 and 55 make up to 2.43, BEST CASE stock above 55 up 12% you make full 2.43 or about 5%.
Downside: stock btwn 52.50 and 43 you lose .07 premium that you paid. WORST CASE stock below 43 (down ~12%) you are Put the stock and you lose .07 premium.
TRADE RATIONALE: If you have conviction that the stock’s under-performance incorporates near term fears about Japan disruption and think that QCOM, INTC and AAPL’s commentary should buoy SNDK’s results and guidance than create a band in which you would get long….commit little premium to do this, but understand that the biggest risk is that you would have mark to market loses if the stock were to head lower quick after earnings and your worst case is that you get Put the stock at 43 on May expiration.
2. BEARISH TRADE – BUY JUNE PUT TREES
SNDK (stock ref 49.10) Buy the MAY 47 / 45 / 43 Put Tree for ~.10
-Buy May 47 Put for 1.51
-Sell May 45 Put at .91
-Sell May 43 Put at .51
Break-Even On May Expiration:
Upside: stock is btwn 46.93 and 47 lose up to .07
Downside: stock btwn 46.93 and 43 make up to 1.93, BEST CASE stock is btwn 45 and 43 you make 1.93, btwn 43 and 40.93 your payoff trails off, but you don’t lose money until below 40.93 down 16.5%.
TRADE RATIONALE: If you think that SNDK will not be able to maintain margins and will suffer component constraints and higher input costs that will put a strain on margins and that prices for Nand will come in over the course of the year causing the company to issue conservative guidance than look to express short term bearish views into earnings through Put Trees.
**IMPORTANT NOTE-for those of you who don’t feel comfortable being net short Puts or don’t want to commit the margin to that second Put then consider put spreads 1 up, those downside Puts are expensive and it makes sense to spread this trade.