SanDisk Corporation Will Buy Back $2.5 Billion of Its Own Stock. Hooray?

By Markets Fool.com

Despite the fact that we are now more than 5 years into an aging bull market, companies continue to plow billions into share buyback plans. Why just last monthSanDisk announced plans to repurchase another $2.5 billion worth of its own shares. That's on top of the $500 million or so in buybacks already authorized under its previous repurchase program. But is this a savvy financial move to scoop up cheap shares, or a misguided attempt by management to support the stock price after its post-earnings collapse?

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SNDK Total Return Price Chart

SNDK Total Return Price data by YCharts

Today, we'll find out, as we ask two basic questions:

Can SanDisk pay?
Well, not right away, at least. Not all at once. But the almost $2.3 billion in cash that SanDisk currently possesses -- plus its nearly $2.8 billion in long-term investments that can be converted to cash -- give SanDisk ample dry powder to complete its buyback.

And even if it weren't enough, S&P Capital IQ data show that last year, SanDisk generated more than $1.46 billion in positive free cash flow from its business. That's enough to pay for the entire buyback in cash, without touching a penny of SanDisk's reserves.

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it pay?
Granted, SanDisk also has $1.2 billion in debt on its books. Might it not be prudent for SanDisk to think about paying that down before committing cash to buybacks? Well, it depends. While busy paying down debt, for example, SanDisk's share price might rise -- and management might miss an opportunity to buy it back cheaply. So, let's take a quick look at the stock's valuation relative to its peers -- and see if now is actually a good time to buy the stock "on the cheap":

P/E

Dividend Yield

5-Year Projected Growth Rate

Total Return Ratio

SanDisk

18.1

1.6%

16.8%

1.0

Western Digital

15.0

1.6%

8.4%

1.5

Seagate

12.9

3.7%

6.2%

1.3

Micron

9.2

-

15%

0.6

Peer comparisonscourtesy of Finviz.com

With its stock trading for more than 18 times earnings, SanDisk seems the priciest stock on the computer memory "block" -- at least at first glance. But there are a couple of factors in SanDisk's favor that bear mentioning.

First and foremost, according to analysts who follow this industry, SanDisk boasts the fastest growth rate on offer -- a blazing hot 16.8% annualized. Combined with the stock's modest 1.6% dividend yield, this adds up to a "total return" ratio of 1.0. Judged by the valuation yardstick of master investor John Neff, who invented the concept, this suggests SanDisk's stock is indeed cheap enough to be worth buying at today's prices.

When you consider further that SanDisk generates 44% more free cash flow than it reports as GAAP net income, the stock may be even cheaper than that. Valued on free cash flow, SanDisk shares carry only an 11.4 P/FCF ratio -- which is very cheap given the projected growth rate.

Meanwhile, relative to the lower-P/E, but slower-growing competition, only Micron comes close to SanDisk for total return on a shareholder's investment. And unlike SanDisk, Micron is currently generating significantly less free cash flow than it reports as GAAP profits -- suggesting the "bargain" price on Micron may be more illusion than reality.

What it means to investors
Long story short, I don't see any really good reason for SanDisk not to buy back its shares today. They're cheap by one measure (P/E), and even cheaper by another (P/FCF). Meanwhile, the SanDisk's positively loaded with cash, and looking for a good place to invest it. If you ask me, investing this cash in buying back undervalued SanDisk shares is a smart move.

The article SanDisk Corporation Will Buy Back $2.5 Billion of Its Own Stock. Hooray? originally appeared on Fool.com.

Fool contributorRich Smithdoes not own, nor is he short, any company named above.You can find him on CAPS, publicly pontificating under the handleTMFDitty, where he's currently ranked No. 303 out of more than 180,000 members.The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.