Of my three Nasdaq favorites, it looks like M-Systems Flash Disk Pioneers (Nasdaq: FLSH) is nosing in front of the other two. The second quarter results that M-Systems published yesterday were more than impressive. What’s interesting is that M-Systems president and CEO Dov Moran forecasts continued improvement in the current quarter, which is the fourth quarter for M-Systems. Moran says that the company’s sales will total “at least $450 million for 2005, and profit per share will be at least $1.00, and possibly more.” Because the record indicates that there is no reason not to believe him, the share, at least as of yesterday, was not expensive. The share is currently priced at a $1.08 profit per share for this year, and $1.36 for next year. That certainly gives the company and the share room to continue their upward march.
If things were that simple, who would need analysts? Unfortunately, as soon as the numbers were released, arguments about the company’s profit margins in the second quarter began. “Terrific, gross profit margins rose to 25%,” I heard someone sigh in relief. There’s no doubt that improvement in gross and operating profit margins, etc. is a wonderful process for balance sheet and financial report scrutinizers. There’s also no doubt that analysts have managed to make these things the Achilles heel of some companies. If you believe in the theory that says, “What you see is what you see,” however, then it’s hard to refrain from smirking at the sight of such peculiar grasping at the profit margins of a company like M-Systems.
In the current macroeconomic situation, and in the state of the semiconductors industry, particularly flash chips, two things are of primary importance to an investor. The first is that M-Systems’ sector is still growing, and now it looks as though this is a matter of general consensus. The second is the company’s management capability.
In short, if you believe that digital storage will continue to prosper, you need a little M-Systems in your portfolio, before it grows up and becomes a queen. Profit margins are very important, indeed, but much less important than development in the sector and management’s ability to position the company to grow with it, and in a leading position. That’s what’s called a good long-term investment.
Published by Globes [online] - www.globes.co.il - on July 26, 2005