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2 Stocks to Buy on Bottom-Line Expansion: SanDisk Corporation (SNDK) and More

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The semiconductor industry has recently been receiving favorable commentary given the improving macro environment. In one of my earlier posts, I discussed briefly how an investor can make money by playing one of the themes on this industry. This time around, I have picked up two such stocks that are expected to witness bottom-line expansion in the near future.

SanDisk Corporation (NASDAQ:SNDK)NXP Semiconductors NV (NASDAQ:NXPI)

The Street maintains a positive outlook on NXP as it expects the company to exhibit levered earnings growth and sees the potential for long-term EPS power of $4.50+. The earnings growth is expected to be driven by accelerating revenue growth, structural gross/operating margin expansion and balance sheet deleveraging. With respect to revenue, a strong product pipeline – Auto, Identification (Authentication, NFC, etc.), Infrastructure & Industrial (High-performance RF) and Portable & Computing (High-speed Interface) – will support long-term revenue growth that is 400-500bps above the industry growth rate.

On margins, the Street sees the potential for NXP to structurally expand its gross margin to ~50% (from current ~46%) and drive the operating margin to ~25% (from current ~20%) over the next 6-12 months. In the long run, the Street sees the potential for NXP to improve gross margin to the target of 52-56% and operating margins to the high-end of the target range of 23-28%. Finally, with respect to NXP’s balance sheet, NXP has net debt of $2.88 billion, resulting in net leverage of 2.9x. NXP is expected to continue to pay down debt with its free cash flow generation and drive the company’s net leverage to at least 2.0x – it is interesting to note that NXP currently has ~$0.85 of EPS tied up in interest expense.

SanDisk Corporation (NASDAQ:SNDK)

The Street seems to be bullish on this stock. While C4Q (fourth quarter in the calendar year) has usually been a time to lower exposure to SanDisk ahead of seasonally poor NAND (a storage technology that doesn’t require power to retain data) pricing in C1Q, the analysis suggests that “normal” seasonal is likely to be more than offset by structural, cyclical and company-specific product drivers. For C1Q13, the Street sees sequential NAND supply growth of +6% versus demand growth of -1%.

More importantly some analysis suggests undersupply throughout 2013, as cyclically depressed CapEx and structurally increasing capital intensity will support supply growth of only 35%, versus smartphone, tablet and SSD (Solid State Drive that offers remarkable data speeds and low power consumption) demand, which is likely to underpin overall demand growth of 45%. In addition to positive industry fundamentals, a positive mix shift is expected at SanDisk (from Consumer, USB and Cards to Embedded and SSD), which should drive incremental leverage. While the consensus CY13 EPS estimate is of $3.45, a potential upside to $4.50 is expected over the next 12-18 months, as the estimates do not fully reflect the expectations for continued cyclical strength or the structural mix shift to higher margin products.

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