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Bull of the Day: SMART Global (SGH)

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SMART Global Holdings (SGH - Free Report) is a $700 million manufacturer of specialty semiconductor memory solutions, including DRAM and flash products. They are also a leading global provider of electronic components supply chain services for major OEMs.

And to fully understand the success of SMART Global requires knowing they are the largest in-country manufacturer of memory for smartphones, PCs, and servers in Brazil.

In November, the company delivered an earnings pre-announcement where management raised their Q1 fiscal year 2018 adjusted EPS view to 90-93 cents from 79-83 cents vs the Zacks Consensus of 82 cents. The revenue outlook was also boosted to $250-$260 million from $225-$240 million, vs the consensus $233 million.

Here's the commentary I gave my TAZR Trader members, where we have owned the stock since October, on the day of SMART Global's first quarter FY18 report (Q1 began in September)...

SMART Global (SGH - Free Report) delivered a strong quarterly report tonight, even beating its own revised guidance.
 
Revenue, gross margin and EPS all exceeded the high end of the revised guidance they gave last month for Q1 FY2018.
 
Shares were up as much as 10% after hours to $34.50 on 220K shares as of 6pm ET.
 
Here's the top of the press release...
 
NEWARK, Calif., Dec. 21, 2017 (GLOBE NEWSWIRE) -- SMART Global Holdings, Inc. (“SMART”), parent company of SMART Modular Technologies, Inc., today reported financial results for the first quarter of fiscal 2018 ended November 24, 2017.
 
First Quarter Fiscal 2018 Highlights:
 
Net sales of $265.4 million, 67% higher than year ago quarter  
GAAP operating income of $31.5 million
GAAP net income of $21.0 million
Adjusted EBITDA of $36.9 million
GAAP diluted EPS of $0.92
Non-GAAP diluted EPS of $1.05
 
Iain MacKenzie, President and Chief Executive Officer of SMART Global Holdings commented in the PR...
 
“Looking ahead, we believe that the outlook is for more improvement in both SMART Brazil and our Specialty Memory businesses.  The recovering economy in Brazil and health in the overall global memory market, combined with strong demand for higher density products from our OEM customers, lead us to be optimistic about continued positive momentum in the upcoming periods."
 
The Earnings Trifecta: Top & Bottom Beats and Guidance Raised
 
With earnings and revenue that both topped analysts' expectations, let's see by how much SMART beat the consensus views and then we'll look at the guidance.
 
For the quarter ended Nov. 24, the specialty memory solutions provider posted non-GAAP earnings of $1.05 per share, compared with the prior-year period's $0.04 per share. The Zacks EPS consensus was for $0.92.
 
SMART revenue was $265.4 million, up 67% from $159.3 million in the same quarter last year. The Zacks consensus was for revenue of $255 million.
 
The company expects fiscal Q2 EPS of $1.30 - $1.36 on revenue of $280 million - $300 million. The Street view is for EPS of $0.91 on revenue of $253.7 million.
 
Let's see if these solid results put SMART back on track to trade near $40 as one of the best values in small-cap Tech right now.
 
Current members already know the roller-coaster we've been on here with the surge to $40 and then retreat on a secondary offering by selling shareholders (the 30-year old company just IPO'd in May).
 
But we kept doing our homework here and we were not scared away when shares dipped under $29. Indeed, that was our cue to add more extreme value last week.

(end of Dec 21 TAZR commentary)

The Little 'Ole Success Story You Never Heard Of
 
Even though they've been in business for 30 years, SMART just IPO'd in May of 2017 at $12. And given its growth trajectory, that was an unbelievable steal.

For FY2018 (ending next August), SGH is now expected to grow the topline over 48% to $1.13 billion from FY2017 sales of $761 million. That gives the stock a very attractive Price-to-Sales ratio of under 0.7X.

Part of the big revenue growth is all about Brazil right now as their economy recovers and consumer demand for digital electronics picks up.
 
But the company also has manufacturing locations in a half-dozen other cities around the globe. Founded in 1988 as Smart Modular Technologies, SGH corporate headquarters are in Newark, California and the company employs over 1,100 people.
 
The company now exists as a holding company for various subsidiaries across its world-wide memory manufacturing and supply chain services.
 
There is an R&D center in Tewksbury, MA and a European Planning & Sales Center in East Kilbride, Scotland. There are sales centers in Hong Kong and Singapore and an Advanced Package Engineering and R&D center in South Korea.
 
From these locations, SMART serves a rich list of industries and applications, including automotive, communications, computing, defense, gaming, industrial, and the cloud.

SMART vs. Micron
 
There have been early bulls and reluctant bulls among Street views on SMART Global in the short time it has shown off this amazing growth since its IPO. Among the early, here's what Jefferies analysts had to say to explain why they raised their PT to $45 in November, courtesy of StreetInsider.com...
 
SGH raised its NovQ rev outlook 10% and its EPS outlook 13% on greater than-expected demand in its Brazil memory segment. SGH has high visibility into demand due to the step-up in local content requirements in Brazil. It also expects FebQ to sustain from NovQ levels as it expects to continue supplying high demand through what is normally a seasonally slow quarter. We raise our target to $45 from $37, applying a 12x multiple to our C'18E EPS of $3.74.
 
But ahead of a secondary share offering by IPO investors, Deutsche and Stifel analysts only raised their PTs to $35 and $40 respectively, as they anticipated further dilution.
 
As I wrote in a November Bull of the Day, another bigger reason for their subdued optimism at the time was probably that those banks model the valuation similar to giant "peer" Micron (MU - Free Report) which currently trades at roughly 7X forward.
 
But Micron is a $50 billion enterprise trading at 2.5X sales.
 
Whereas SGH is a $700 million company trading at under 0.7X sales estimates -- and, more importantly, with a higher double-digit growth rate.
 
Indeed, SGH could be an acquisition target for the behemoth of memory.

But I hope it grows and trades a lot higher before it becomes anyone's target.

And since that Dec 21 report, Deutsche and Stifel analysts have "gotten SMARTer" and raised their PTs to $45 and $47 respectively.

Disclosure: I own SGH shares for the Zacks TAZR Trader portfolio.

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