Bear of the Day: SMART Global Holdings (SGH)

Headquartered in Newark, California, SMART Global Holdings (SGH) designs, manufactures, and supplies electronic subsystems to original equipment manufacturers (OEMs), and engages primarily in the computer, industrial, networking, telecommunications, and aerospace and defense markets. SMART Global operates throughout the U.S., Europe, Asia, and Latin America.

Disappointing Q2 Earnings

While earnings of 77 cents per share beat the Zacks Consensus Estimate of 75 cents, EPS declined considerably from the year-ago quarter; Q2 2018 earnings were $1.64 per share.

Revenues of $304 million missed our consensus estimate and declined 3.2% year-over-year due to weakness in the company’s Brazil business. Net sales in SMART Global’s Brazil segment fell 29.5% year-over-year to $147.1 million on a “worsening price environment” for smartphone and PC commodity memory products.

However, SGH’s specialty memory segment saw sales increase nearly 10% from the year-ago quarter to $115.6%. And to its acquisition of Penguin Computing last summer, the company’s specialty compute and storage solutions segment posted sales of $41.3 million.

On top of these weak results was a weak outlook for SGH’s third quarter. SMART Global expects net sales between $260 million and $270 million and adjusted earnings in the range of 34 cents and 38 cents per share. Analysts were projected EPS of 90 cents per share on revenues near $332 million.

Falling Estimates

Analysts have since turned bearish on SMART Global, with four cutting estimates in the last 60 days for the current fiscal year. Earnings are expected to decline 43% for the year, and the Zacks Consensus Estimate has dropped over one dollar during that same time period from $4.63 to $3.61 per share.

This sentiment has stretched into 2020, though the shifting tide hasn’t been as dramatic. Earnings could see growth of around 6%, but our consensus estimate has dropped significantly in the past two months.

SGH is now a Zacks Rank #5 (Strong Sell).

Shares of the specialty memory leader have fallen almost 27% since January. In comparison, the S&P 500 is up almost 16% year-to-date.

Bottom Line

Disappointing results in the second quarter coupled with a not-so-stellar third-quarter outlook is never a good combination.

While CEO Ajay Shah points out the progress made despite a challenging business environment—and there is progress, like in the company’s specialty memory and specialty compute segments—investors were left needing more from SMART Global.

If you’re an investor interested in adding a computer memory or chip stock to your portfolio, consider Advanced Micro Devices (AMD). Shares of Zacks Rank #3 (Hold) AMD have gained over 60% since January and earnings are expected to grow almost 40% this fiscal year.

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