# SanDisk's Stock by the Numbers

Updated

Numbers can lie -- but they're the best first step in determining whether a stock is a buy. In this series, we use some carefully chosen metrics to size up a stock's true value based on the following clues:

• The current price multiples

• The consistency of past earnings and cash flow

• How much growth we can expect

Let's see what those numbers can tell us about how expensive or cheap SanDisk (NAS: SNDK) might be.

The current price multiples
First, we'll look at most investors' favorite metric: the P/E ratio. It divides the company's share price by its earnings per share -- the lower, the better.

Then, we'll take things up a notch with a more advanced metric: enterprise value to unlevered free cash flow. This divides the company's enterprise value (basically, its market cap plus its debt, minus its cash) by its unlevered free cash flow (its free cash flow, adding back the interest payments on its debt). Like the P/E, the lower this number is, the better.

Analysts argue about which is more important -- earnings or cash flow. Who cares? A good buy ideally has low multiples on both.

SanDisk has a P/E ratio of 10.1 and an EV/FCF ratio of 15.7 over the trailing 12 months. If we stretch and compare current valuations to the five-year averages for earnings and free cash flow, SanDisk has a P/E ratio of 42.2 and a five-year EV/FCF ratio of 13.5.

A positive one-year ratio under 10 for both metrics is ideal (at least in my opinion). For a five-year metric, under 20 is ideal.

SanDisk has a mixed performance in hitting the ideal targets, but let's see how it compares against some competitors and industry mates.

SanDisk

10.1

15.7

42.2

13.5

Western Digital

14.2

6.6

11.7

7.0

STEC

15.1

3.2

13.5

8.0

Micron Technology

NM

NM

NM

55.2

Source: S&P Capital IQ. NM = not meaningful due to losses.

Numerically, we've seen how SanDisk's valuation rates on both an absolute and relative basis. Next, let's examine...

The consistency of past earnings and cash flow
An ideal company will be consistently strong in its earnings and cash flow generation.

In the past five years, SanDisk's net income margin has ranged from -69.8% to 25.6%. In that same time frame, unlevered free cash flow margin has ranged from -11% to 29%.

How do those figures compare with those of the company's peers? See for yourself:

Source: S&P Capital IQ; margin ranges are combined.

Additionally, over the last five years, SanDisk has tallied up four years of positive earnings and four years of positive free cash flow.

Next, let's figure out...

How much growth we can expect
Analysts tend to comically overstate their five-year growth estimates. If you accept them at face value, you will overpay for stocks. But while you should definitely take the analysts' prognostications with a grain of salt, they can still provide a useful starting point when compared to similar numbers from a company's closest rivals.

Let's start by seeing what this company's done over the past five years. In that time period, SanDisk has put up past EPS growth rates of 36%. Meanwhile, Wall Street's analysts expect future growth rates of 14.4%.

Here's how SanDisk compares to its peers for trailing five-year growth (due to losses, Micron's trailing growth rate isn't meaningful):

Source: S&P Capital IQ; EPS growth shown.

And here's how it measures up with regard to the growth analysts expect over the next five years:

Source: S&P Capital IQ; estimates for EPS growth.

The bottom line
The pile of numbers we've plowed through has shown us the price multiples shares of SanDisk are trading at, the volatility of its operational performance, and what kind of growth profile it has -- both on an absolute and a relative basis.

The more consistent a company's performance has been and the more growth we can expect, the more we should be willing to pay. We've gone well beyond looking at a 10.1 P/E ratio and we see that SanDisk's five-year P/E is quite a bit higher due to big losses in 2008. However, since a good bit of those expenses were non-cash in nature (e.g., goodwill impairment), its five-year EV/FCF is pretty low.

Don't get too excited about the earnings growth over the last five years. That's more a testament to earnings volatility than anything.

As another data point, our CAPS community rates SanDisk four stars (out of five). There are some good numbers and some bad numbers here, but all this is just a start. If you find SanDisk's numbers or story compelling, don't stop. Continue your due diligence process until you're confident one way or the other. As a start, add it to My Watchlist to find all of our Foolish analysis.

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At the time thisarticle was published Anand Chokkaveluholds no position in any company mentioned. The Motley Fool owns shares of Western Digital. The Motley Fool has adisclosure policy. We Fools may not all hold the same opinions, but we all believe thatconsidering a diverse range of insightsmakes us better investors. Try any of our Foolish newsletter servicesfree for 30 days.