By:
Nicholas Arco, AIM Student at Marquette University
Disclosure:
The AIM Equity Fund currently holds this position. This article was written by
myself, and it expresses my own opinions. I am not receiving compensation for
it and I have no business relationship with any company whose stock is
mentioned in this article.
• SMART Global Holdings, Inc. (NASDAQ:SGH) designs, manufactures, and
sells specialty high value memory, storage and compute products and solutions
to the electronics industry.
• SGH reported Q2 earning
on March 28th, beating EPS consensus, but missing on revenues.
• Softening in Brazil
(62% of FY18 Revenues) continues, putting downward pressure on revenue
estimates.
• SGH expects to see
Brazilian market opportunity to grow substantially in the coming year, despite
skepticism.
• Q2’19 gave the worst
results in multiple financial metrics that SGH has seen over the last 10
quarters. This spells trouble from a fundamental analysis standpoint.
Key
points:
EPS for Q2’19 was $0.77, $0.02 ahead of consensus, and
on the high end of guidance: $0.73 - $0.77. This was a clear positive for SGH,
but the company missed on revenues, reporting ~$304 million, well below the
street’s estimate of $317 million for the quarter, and below guidance of $310 -
$325 million. The stock got battered on this news, falling 24%.
There has been softening
in Brazil, which does not bode well for SGH as they recognize a majority of their
revenues from that country. To that point, revenue was guided between $260 and
$270 million which was well below the street estimate of $332 million. However,
SGH remains confident that the Brazilian market is growing and there will be
increased opportunity going forward.
Management estimates that
the Brazil Mobile total addressable market (TAM) is estimated to be $750
million by 2020, which would represent a 17% CAGR from 2016. Additionally, SGH
estimates that the Brazil Battery TAM will be $238 million by 2020, an 18% CAGR
from 2016. While there is some question about the viability of the Brazilian
market, an increased addressable market, could mean further potential upside
after all.
Q2’19 was not only
disappointing from a revenue standpoint, but gross income saw negative growth
from the first time in ten quarters, pushing gross margins the lowest they’ve
been since Q1’16. EBIT also saw negative
growth for the first time in ten quarters, pushing the margin down to 7.4%, a
drop of ~40%.
What
has the stock done lately?
After SGH reported
earnings on March 28, revealing that they missed on some key metrics, the stock
tumbled, giving up 24% and peeling about $108 million off its market cap. Since
falling to $19.15, the stock has climbed up about 11% over the last 5 days, now
sitting at $21.58. Note that its 52 high – low range is $51.64 – $18.27.
Past
Year Performance:
SGH is down a whopping 52% over the last
year. More recently, year-to-date the stock is down 27%. The program bought the
stock around $32 in October 2018, hoping to get it cheap while it was
substantially off its 52 week high, but it has since been beaten close to its
52-week low. Since the AIM program assumed the position, the stock is down 34%.
Source:
FactSet
My
Takeaway:
SGH seemed to be growing
at a consistent pace with solid margin expansion and nice EPS growth. However,
while Brazilian sales seemed to be going strong, the market has softened,
hurting this stock’s thesis tremendously. Furthermore, having had one of the
worst quarters in the last 2.5 years, there are serious red flags associated
with this company that could signal that the worst is not over, even with a
growing Brazilian TAM. Unless the company bounces back with an overly strong
Q3, the stock’s best days are likely behind it and its $44 previous price
target seems to be out of the question. Having dropped so substantially from
the time it was pitched, the program will be looking at the exiting its
position in the stock.
Source:
FactSet
