Globes, July 20, 2004
Analysts raise M-Systems estimates

Hambrecht's Daniel Amir and RBC's Satya Chillara are impressed by the company's Q2 results, but differ on prospects for its stock. Globes' correspondent

"FLSH provided a blowout quarter with strong execution, raising of guidance for 2004, and accelerated growth of both the USB flash drives and MDOC for the handset market," writes analyst Daniel Amir of US investment house WR Hambrecht & Co. about the second quarter results of M-Systems Flash Disk Pioneers (Nasdaq:FLSH), released yesterday.

Amir maintains a "Buy" rating for the M-Systems share, and sets a target price of $20, up from $18 previously. His optimism contrasts with the cool reception given to M-Systems' results by the market. The company's shares fell 5.78% on Nasdaq yesterday to close at $14.34, giving the company a market cap of $498.07 million.

RBC Capital Markets analyst Satya Chillara is less upbeat. He gives M-Systems a "Sector Perform" rating because of a "relatively full valuation", and reduces his target price for the share from $19 to $16.

Chillara describes M-Systems results as "solid", but notes that, at 23.8%, the company's gross margins were lower than his estimate of 26%, adding, "we believe this was attributable to continued strong growth of DiskOnKey (USB flash drive)." He expresses skepticism about prospects for M-Systems' MDOC storage solution for mobile telephones, saying, "we remain cautious on MDOC's long-term prospects given its relatively radical approach of displacing NOR while offering NAND storage within cell phones."

Chillara nevertheless raises his revenue estimate for 2004 from $300.9 million to $338.3 million, and his EPS estimate from $0.52 to $0.61. For 2005, he sees EPS of $0.79 on revenue of $449 million. Amir's estimates are EPS $0.59 on $339 million revenue in 2004 (up from $0.55 and $293 million), and EPS $1.06 on $424 million revenue in 2005 (up from $0.99 and $388 million).

On the lower than expected gross margins in the second quarter, Amir says, "Gross margin declined to 23.7% from 25.7% due to product mix (higher USB flash drives). While investors may see this negatively, we point to three positive points for the company: 1) overall, gross margin in each product group was stable (rather than declining like Lexar); 2) guidance for Q3 and for the year reflects stable gross margins in the second half of 2004 and; 3) potential upside to gross margins could occur from better NAND flash pricing and increase in MDOC revenues. DOK continues to sell well and MDOC is ready to take off."

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