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Bull of the Day: SMART Global (SGH)

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I last wrote about SMART Global Holdings (SGH - Free Report) in early January after they delivered another earnings "trifecta" of sales and profit beats and raised guidance.

In that report, I compared the small-cap to its giant peer in the computer and mobile DRAM and NAND flash memory industry, Micron (MU - Free Report) . I'll make some fresh comparisons later in today's report, right after we talk about what happened last week.

Because SGH just did it again and on a day when the market melted down over 2% due to trade war fears, SMART was up 11% on Friday.

SMART gave faithful investors who kept accumulating shares under $35 during the correction in February another blow-out quarter with a 20% to 30% EPS beat (GAAP vs. Non-GAAP) and an 8.25% beat on the top line!
 
There was 10-cents of beneficial currency tailwinds that most analysts will mentally back-out of the beat.
 
Guidance was also very strong...
 
SGH sees ‍Q3 of fiscal 2018 (ends August) net sales of $320 TO $340 million vs the Zacks consensus of $294 million.

SGH sees Q3 adjusted EPS of $1.74 TO $1.82 (GAAP $1.61-69) vs. the Zacks consensus of $1.28.
 
Second Quarter Fiscal 2018 Highlights

  • Net sales of $314.0 million, 83% higher than prior year quarter
  • GAAP operating income of $45.1 million
  • GAAP net income of $36.8 million
  • Adjusted EBITDA of $56.2 million
  • GAAP diluted EPS of $1.60*
  • Non-GAAP diluted EPS of $1.73*

*(GAAP and Non-GAAP diluted EPS include $0.10 of EPS due to FX gains)

Iain MacKenzie, President and Co-CEO of SMART Global had this to say about the company's performance...
 
“The second quarter of fiscal 2018 came in above expectations as we benefited from multiple growth drivers. The overall memory industry supply and demand dynamics remained favorable with respect to increasing memory densities and pricing. Additionally, in Brazil, the economy continued to improve and we benefited from local content requirements. Lastly, we once again demonstrated exceptional operating expense control and operating leverage in our financial model."
 
“We remain confident in our ability to drive additional growth and improvement in both SMART Brazil and our Specialty Memory businesses as the global memory market and economic trends in Brazil remain positive, and we see increasing demand from our OEM customers, particularly in the storage and networking end markets,” added Mr. MacKenzie.
 
“As we announced on March 14, 2018, I am very pleased that Ajay Shah has agreed to accept the role of President and CEO. Ajay’s extensive industry knowledge and long history with SMART make him the ideal executive to lead SMART through this next phase of growth. I look forward to working closely with Ajay through this transition,” concluded Mr. MacKenzie.
 
(end of SGH press release excerpts)

The management switch was announced a week prior and investors apparently loved it as shares soared to new highs above $40 on very strong volume.
 
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.

Here's what I wrote about SGH in January...

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 was the view of Jefferies analysts last November to explain why they raised their PT to $45...
 
SMART Global raised its November quarter revenue 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 the Feb quarter 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.

After the strong Feb quarter just delivered, that calendar 2018 EPS estimate now is over $5, and rising.
 
That's why analysts are scrambling again to raise estimates and price targets. More on those in a moment.
 
As I wrote in a November Bull of the Day, another bigger reason for investors and analysts being so far behind on the SGH growth story is probably some measure of subdued optimism because those banks model the valuation similar to giant "peer" Micron which historically trades between 6X and 8X forward EPS.
 
But Micron is a $50 billion enterprise trading at nearly 2X sales.
 
Whereas SGH is a sub-$1 billion company trading at under 1X 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.

Since the company's December report, Deutsche and Stifel analysts "got SMARTer" and finally raised their PTs to $45 and $47, respectively.

Now let's take a look at the moves they made Friday...

Analysts Raising Estimates and Price Targets

SMART may not be a Zacks #1 Rank if you are reading this on Monday, but by the end of the week it should be as all the analyst earnings estimate revisions (EER) get filtered and factored into our calculation.

We know this because SMART guidance was over 30% above the prior consensus EPS for the year.

Until then, let's look at the i-banks raising their price targets...

Needham & Company boosted their PT from $46 to $75
Barclays upped their rating from Positive to Overweight and bumped their PT from $40 to $55
Stifel Nicolaus raised their PT from $47 to $56
Deutsche Bank also jumped their PT up to $56 (of note, they had notched their target up to $48 before earnings)

Finally, Roth Capital raised their PT to $60 over a week ago. After earnings, they move to $70. They were the most bullish before earnings and they nailed it.

Well, almost as bullish as yours truly.

Micron the Megalodon of Memory

Incidentally, Micron also reported their Q2 fiscal '18 last Thursday. The giant in memory beat on the top and bottom but shares fell 8% even with several significant price target bumps.

What's important for SMART investors though, is that the Micron outlook for DRAM and NAND flash was very strong. So strong, in fact that Micron can't keep up with demand. And that means they both have pricing power.

Micron has seen an uptick in demand and prices for its memory chips as more customers look to store data and apps in smartphones and companies shift to cloud.
 
CEO Sanjay Mehrotra said "Our performance was accentuated by an ongoing shift to high-value solutions as we grew sales to our cloud, mobile and automotive customers and set new records for SSDs and graphics memory," he added.
 
"Secular technology trends are driving robust demand for memory and storage, and Micron is well-positioned to address these growing opportunities."

Once again, when investors everywhere are ready to call "the semiconductor cycle top" and throw the baby out with the bath water in a correction/tantrum over the trade war, these companies are still seeing strong demand from cars, phones, datacenters, and the revolution in Artificial Intelligence that is creating new industries at a stunning pace.

You can learn more about these world-changing trends in my special report from December, The Technology Super Cycle.

There I recommended NVIDIA (NVDA - Free Report) and Lam Research (LRCX - Free Report) for the same reasons as investors should have bought MU and SGH.

And it's how I more than tripled my followers' money in Broadcom (AVGO - Free Report) since 2014, and I don't see any signs of the Technology Super Cycle topping yet.

Cooker's bottom line: Buy this dip in Semis and Tech!

Disclosure: I own shares of SGH, NVDA, and LRCX for the Zacks TAZR Trader portfolio.

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