Must-know: A guide to Blue Ridge Capital’s 4Q13 positions (Part 5 of 8)
Blue Ridge Capital and SanDisk
Blue Ridge Capital initiated new positions in Marathon Petroleum Corp. (MPC), Actavis Plc (ACT), Apple Inc. (AAPL), SanDisk Corp. (SNDK), and Cheniere Energy Inc. (LNG). Notable positions that were exited include Ralph Lauren Corp. (RL) and Tenet Healthcare Corp. (THC).
Flash memory card maker SanDisk Corp. (SNDK) is a brand new position started by Blue Ridge last quarter. The company accounts for a 1.84% position in the hedge fund’s portfolio.
SanDisk’s solutions include solid-state drives (or SSDs), embedded products, removable cards, universal serial bus or USB drives, wireless media drives, digital media players, and wafers and components. The SSD products are used in both client computing platforms and enterprise data centers and provide high-speed, high-capacity storage solutions that can be used in lieu of hard disk drives. The embedded flash products are used in mobile phones, tablets, computing platforms, imaging devices, and many other products. The removable cards are used in a wide range of consumer electronics devices such as mobile phones, tablets, digital cameras, gaming devices, and personal computers.
The company’s products are made by combining NAND flash memory with a controller and firmware. In order to reduce the cost of NAND flash memory to grow existing and future markets, SanDisk has invested heavily in a vertically integrated business model, which includes investments in high volume, state-of-the-art NAND flash manufacturing facilities in Japan through its ventures with Toshiba and its in-house assembly and test facility in Shanghai, China. The move aims to reduce the costs of producing its products, control the quality of its products, and provide efficient delivery to its customers.
SanDisk’s earnings and revenue for the fourth quarter were above analyst estimates. Adjusted earnings for the quarter rose to $390 million, or $1.71 per share, from $257 million, or $1.05 per share, last year. Revenue increased 12%, to $1.73 billion from $1.54 billion last year. SanDisk supplies flash memory to Apple and said in fiscal year 2013 that Apple accounted for 20% of SanDisk’s revenue.
The company, which is one of the chosen brands in NAND chips for mobile devices, saw its profits triple in 3Q, as a fire at rival Hynix led to increased prices due to a temporary supply shortage. The company also benefited due to a favorable yen rate and product mix with increasing use of its 19-nanometer NAND flash memory chips. SanDisk has seen a shift in its strategy towards higher-margin products such as SSDs with its acquisition of SMART Storage Systems. In 4Q, the company said client and enterprise SSD sales increased sequentially to account for 21% of total revenue. SSDs are expensive replacements for a hard drive but are generally faster and consume less power.
SanDisk’s guidance was below analyst estimates. The company said for 2014 it expects a healthy balance between industry demand and supply in the NAND flash memory space but expects prices to be softer compared to 2013. The 1Q 2014 revenue estimate is at $1.45 billion to $1.525 billion, while the full-year estimate is at $6.4 billion to $6.8 billion. The company is investing in the development of its 3D NAND technology and said the pilot production will start “in the latter part of 2015.” Samsung rolled out the industry’s first 3D NAND device in August of last year. TrendForce estimates that 3D NAND products will grow from 3% this year to account for 20% of the market by 2015.
According to data provided by IHS iSuppli, a market research firm, SSD shipments increased by 82% in 2013 and the shipments of hard drives declined by 5%. IHS ISuppli anticipates SSD shipments to increase by 50% in 2014 and is predicted to touch 260 million units in next three years. SanDisk’s peers include Micron Technology (MU), Western Digital (WDC), Samsung (SSNGY), and Seagate (STX).
Browse this series on Market Realist: