Good news first
Let’s take these in order, beginning with SanDisk Corporation (NASDAQ:SNDK), which is up more than 2% today after reporting $1.06 per share in profits on $1.5 billion in revenues — beating analyst estimates on both counts. Speaking of counts, the number of analysts upping their price targets on the stock had reached five at last count, with Needham & Co. leading the pack with a projection of $80 a share.
That target is close to $20 above where the shares now trade, suggesting a potential 31% profit in the stock. But can investors realistically hope to capture those profits?
Yes, it very well might. SanDisk Corporation (NASDAQ:SNDK) turned in a truly magnificent quarter yesterday. Thanks to the beaucoup profits, the company’s P/E ratio now stands just a hair below 21 — versus the near-31 times earnings valuation still being shown on Yahoo! Finance’s key statistics page. If the company succeeds in hitting the 28% annualized, long-term growth estimate that analysts have it pegged for, 21 times earnings is an absolute steal of a deal on this stock. Plus, with trailing free cash flow now clocking in at $940 million — versus “only” $718 million in GAAP net earnings — this stock’s arguably even cheaper than it looks.
Fact is, at a price-to-free cash flow ratio of less than 16 today, I think SanDisk Corporation (NASDAQ:SNDK) will be a great bargain if the stock even posts growth in the upper teens over the next five years. If it gets into the 20-percent range, though, look out … above!
Paging Dr. Profit
In contrast, I’m less enthused about Johnson & Johnson (NYSE:JNJ), the buy rating Argus Research is still assigning it, and the new $104 price target Argus has suggested.
Don’t get me wrong. Johnson & Johnson (NYSE:JNJ)’s report yesterday was fully as good as SanDisk Corporation (NASDAQ:SNDK)’s with revenues ($17.9 billion) and per-share profit ($1.32) both beating expectations. My objections to this stock center less on the success of the business, and more on the price that investors are being asked to pay to own a piece of that business.
Simply put, Johnson & Johnson (NYSE:JNJ) shares cost too much. Based on the most recent data the company has provided us (which does not include free cash flow data, tsk, tsk), Johnson & Johnson shares now trade for nearly 20 times earnings. That’s quite a lot to pay for a company that few analysts see growing earnings at much more than a 6% annualized rate over the next five years.
In fact, even Johnson & Johnson (NYSE:JNJ)’s generous 2.9% dividend yield isn’t enough to entice me to buy these shares. As great a company it may be, Johnson & Johnson (NYSE:JNJ)’s stock price is a prescription for portfolio underperformance.
And speaking of underperformance…
One of the very few stocks getting hit with a reduction in price target today is oil refiner HollyFrontier Corp (NYSE:HFC). Over at Imperial Capital, analysts just cut $10 off their target price for Holly shares. (And Holly didn’t even report earnings yesterday).
