Benjamin Graham taught that Intelligent Investors must do a thorough fundamental analysis of investment opportunities to determine their intrinsic value and inherent risk. Â This isÂ best done by utilizing a systematic approach to analysis that will provide investors with a sense of how a specific company compares to another companyÂ or by reviewing theÂ 5 Undervalued Companies for the EnterprisingÂ Investor.Â By using theÂ ModernGraham methodÂ one can review a company’s historical accomplishments and determine an intrinsic value that can be compared across industries. Â What follows is a specific look at how Sandisk Corporation (SNDK)Â fares in theÂ ModernGraham valuation model.
Company ProfileÂ (obtained fromÂ Google Finance):Â SanDisk Corporation designs, develops and manufactures data storage solutions in a range of form factors using its flash memory, controller and firmware technologies. The Companyâ€™s solutions include removable cards, embedded products, universal serial bus (USB), drives, digital media players, wafers and components. Its removable cards are used in a range of consumer electronics devices, such as mobile phones, digital cameras, gaming devices and laptop computers. Its embedded flash products are used in mobile phones, tablets, ultrabooks, eReaders, global positioning system (GPS), devices, gaming systems, imaging devices and computing platforms. For computing platforms, it provides storage solutions known as solid-state drives (SSDs) that can be used in lieu of hard disk drives. In July 2014, the Company acquired Fusion-io, developer of flash-based PCIe hardware and software solutions that enhance application performance in enterprise and hyperscale datacenters.
Defensive Investor – must pass at least 6 of the following 7 tests: Score = 3/7
- Adequate Size of Enterprise – market capitalization of at least $2 billion – PASS
- Sufficiently Strong Financial Condition – current ratio greater than 2 – PASS
- Earnings Stability – positive earnings per share for at least 10 straight years – FAIL
- Dividend Record – has paid a dividend for at least 10 straight years -Â FAIL
- Earnings Growth – earnings per share has increased by at least 1/3 over the last 10 years using 3 year averages at beginning and end of period – PASS
- Moderate PEmg ratio – PEmg is less than 20 -Â FAIL
- Moderate Price to Assets – PB ratio is less than 2.5 or PB x PEmg is less than 50 – FAIL
Enterprising Investor – must pass at least 4 of the following 5 tests or be suitable for a defensive investor: Score = 5/5
- Sufficiently Strong Financial Condition, Part 1 – current ratio greater than 1.5 -Â PASS
- Sufficiently Strong Financial Condition, Part 2 – Debt to Net Current Assets ratio less than 1.1 – PASS
- Earnings Stability – positive earnings per share for at least 5 years – PASS
- Dividend Record – currently pays a dividend – PASS
- Earnings growth – EPSmg greater than 5 years ago -Â PASS
|Value Based on 3% Growth||$61.41|
|Value Based on 0% Growth||$36.00|
|Market Implied Growth Rate||7.00%|
|Net Current Asset Value (NCAV)||$4.63|
Balance Sheet – 6/29/2014
Earnings Per Share
Earnings Per ShareÂ – ModernGraham
Sandisk is suitableÂ for the Enterprising Investor but not the Defensive Investor. Â The Defensive Investor is concerned with the short dividend history, the insufficient earnings stabilityÂ over the last ten years as well as the high PEmg and PB ratios. Â The company passes all of the Enterprising Investor’s requirements. Â As a result, Enterprising InvestorsÂ following the ModernGraham approach based on Benjamin Graham’s methods should feel comfortable proceeding with research into the company and comparing it to other opportunities. Â As for a valuation,Â the company appears to be undervalued after growing its EPSmg (normalized earnings) from $0.65 in 2010 to an estimated $4.24 for 2014. Â This level of demonstrated growth outpacesÂ the market’s implied estimate of 7.00%Â earnings growth and leads the ModernGrahamÂ valuation model, based on Benjamin Graham’s formula, to return an estimate of intrinsic value aboveÂ the price.
The next part of the analysis is up to individual investors, and requires discussion of the company’s prospects. Â What do you think? Â What value would you put on Sandisk Corporation (SNDK)? Â Where do you see the company going in the future? Â Is there a company you like better? Â Leave aÂ comment on ourÂ Facebook pageÂ or mentionÂ @ModernGrahamÂ on Twitter to discuss.
Disclaimer: Â The author did not hold a position in Sandisk Corporation (SNDK)Â orÂ in any other company mentioned in this article at the time of publication and had no intention of changing that position within the next 72 hours. Â Logo taken from Wikipedia for the sole purpose of identifying the company; this article is not affiliated with the company in any manner.