SanDisk Corporation (SNDK), the global leader in flash memory cards is scheduled to report  its third quarter results on Tuesday, October 20, 2009. In the last two quarters, the company's actual earnings exceeded the market's consensus significantly.

Analysts' estimates for the quarter ending September 2009 (Q3) range from a low of $0.06 to a high of $0.67, with a consensus of $0.253. For the fiscal quarter ending September 2009, the consensus EPS forecast has increased over the past week from $0.234 to $0.253 (8.12%) and increased over the past month from $0.198 to $0.253 (27.78%). Of the 15 analysts making quarterly forecasts, 7 raised and none lowered their forecast.

In the first half, the company was able to weather the slow economy by leveraging its diversified channels and global brand, with approximately 60% of its second quarter product revenues coming from outside the US and 41% coming from OEM customers. In the third quarter, I expect the demand for the company's products to have grown at a modest pace, with growth primarily from OEM mobile customers. Industry bit supply is expected to have also grown at a modest pace in the third quarter, as idle wafer capacity has largely returned to production and technology conversions will continue as well. I expect approximately 50% of Sandisk's captive bit output in the third quarter to be on three bits per cell architecture X3 on 43 nanometer technology. The company's 32 nanometer transition has begun and I expect the company to increase its production over the next several quarters.

Since early July, Sandisk has been running its captive fab capacity at full utilization, however, its inventory is still on the high side so the company might have cut back the fab utilization rate late in the third quarter of the year in anticipation of pickup in holiday sales. NAND flash memory chip spot market pricing jumped 24% in Q3, while contract prices also increased 9%. So, I guess, Q3 revenue and earnings should come in at higher rates.

Going forward, for the fiscal year ending December 2009, the consensus EPS forecast has increased over the past week from $0.275 to $0.319 (16.00%) and increased over the past month from $0.182 to $0.319 (75.27%). Of the 15 analysts making yearly forecasts, 8 raised and none lowered their forecast.

The main worries at this stage are –

1) negative price elasticity which could limit bit sales,

2) gross margin downside risk from new, lower Samsung royalty rates taking effect.

The company's shares closed Wednesday at $22.48, compared to the 52 week range of $5.07 - $23.2. The stock seems to be 6% overvalued at the current levels.