Shares of flash-memory-maker SanDisk Corp. (SAND) fell in trading Monday after Merrill Lynch cut its investment rating on the stock to neutral from buy.
In a research report, Merrill analyst Sidney Ho said declining prices for NAND memory chips, which are used in things like MP3 players and digital cameras, prompted his downgrade of SanDisk.
According to the analyst, supply of NAND chips is expected to exceed demand in the second half of the year, thus resulting in pricing declines which will weigh on SanDisk's business. Ho said he is estimating a 50% decline in NAND chip prices for the remainder of the year, with pricing coming down 20% to 25% in the third and fourth quarters. The analyst did note that SanDisk's business in the near term "appears to be healthy," although he is concerned about the longer-term.
For the full year 2005, Ho cut his EPS estimate on SanDisk to $1.40 a share from $1.50 and his 2006 EPS estimate to $1.60 from $1.80.
Recently, shares of SanDisk were trading down 4%, or $1.08, to $24.45, on volume of 2.5 million shares. Average daily volume is 4.2 million.
SanDisk wasn't the only memory-chip company to get a downgrade from Merrill Monday. The investment firm also cut its rating on shares of Micron Technology Inc. (MU) to sell from neutral.
In a research report, analyst Joseph Osha said that, with the memory-chip market facing declining prices, Micron faces "significant financial challenges." According to the analyst, Micron faces a high capital-spending budget at the same time that it has $200 million of debt due in September. If the memory chip market doesn't improve quickly, Micron could be forced to seek additional funding, he said.
"With DRAM (dynamic random access memory chip) margins expected to be in the red and inventories rising, we think the stock is likely to decline," wrote Osha in the research report.
Recently, shares of Micron were trading down 2%, or 24 cents,` to $10.58, on volume of 1.3 million shares. Average daily volume is 6.9 million shares.
Officials at Micron and SanDisk weren't immediately available to comment. The Merrill analysts don't own shares of the chip makers although Merrill intends to seek investment banking relationships with both companies.
-By Donna Fuscaldo, Dow Jones Newswires
