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Citigroup flipflop on M-Systems: Now it's a Buy

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midastouch017   Tuesday, 02/28/06 10:26:46 AM
Re: mick post# 36
Post # of 47 
Citigroup flipflop on M-Systems: Now it's a Buy

28.2.06 | 16:32 By Omri Cohen

For the third time inside seven months, Citigroup has revisited its recommendation of flash technology (nonvolatile memory) stocks SanDisk Corporation (Nasdaq:SNDK) and M-Systems (Nasdaq: FLSH).

At the end of July 2005, analyst Craig Ellis gave both companies Buy ratings. His report triggered steep gains by both, prompting him to downgrade them to Hold in October. Yet both continued to climb to heights not seen in years.

Time to get into M-Systems stock?

In the last month, though, SanDisk and M-Systems were hit by profit-taking, a lot of it. SanDisk lost 22% and shares in the Israeli company retreated by 25%, placing them significantly below Ellis' price targets.

Yesterday he reversed and restored a Buy rating to the two stocks, leaving his targets unchanged: $79 for SanDisk and $38 for M-Systems.

His word evidently bears weight: the recommendations sent both stocks soaring on Nasdaq.

Regarding M-Systems, Ellis wrote that growing sales of cellphones, the introduction of the new mega-SIM cards and of removable memory cards has created a long-term growth driver. The spike in the company's share price in the fourth quarter of 2005, and the risk of low gross margin in the present quarter, persuaded him to wait for an appropriate point to recommend that investors get into the stock. That point has arrived, he believes.

Ellis raised his growth forecast for M-Systems' 2006 revenues from 35% to 43%. He believes the company's gross margin will be 22.5% of sales, mainly because of weakness in the second half of 2006.

For the year 2007, he also increased his revenue growth forecast, by a lot: from 9% to 21%.

The greatest challenge that M-Systems faced in the last year was having only two suppliers for the chips it designs: Toshiba and Samsung. By this summer, the South Korean company Hynex should commence production for M-Systems.

Deutsche Bank also feels that at its present levels, investors would be wise to pick M-Systems stock, if their horizon is longer than half a year.



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