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Jelly Roll Capital Equity Research |
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Market Analysis, Education, and Wall Street-Quality Stock Reports |
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Western Digital (WDC) |
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Selected Analyst Coverage (Target): W.R. Hambrecht — Buy ($26) A.G. Edwards — Buy ($24) Prudential Equity — Underweight ($17) |
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WDC Closed at $16.50 on 4-10-07 |
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Released 4-10-07 |
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Western Digital Corp. (ticker: WDC) is a designer, manufacturer, and seller of hard disk data storage drives. Western Digital’s products are used in desktop and laptop computers, enterprise servers and workstations, and consumer electronics. · Western Digital is one of the world’s largest manufacturers of hard disc drives (HDD), with the majority of its units being used in desktop computers. This has the dual effect of giving Western Digital higher operating margins than competitor Seagate Technology (ticker: STX), with WDC generating an 8.5% margin to Seagate’s 4.7%, as well as leaving room for Western Digital to enter new fields that its profitability is not currently dependent on. · On Monday, April 9th, Western Digital’s competitor Seagate pre-announced that it was lowering its anticipated Q3 revenues and margin guidance, which lead to a 6.2% decline in STX and a 3% decline in WDC. · The sell-off today was part of a continuation of the downtrend that both STX and WDC have been experiencing, with both stocks down more than 15% year-to-date. · We believe that, while the decline in STX is justifiable due to declining margins, WDC has traded down in sympathy more on general indiscriminate selling than for any solid fundamental factor, as it has actually improved margins. · For the trailing twelve month period, WDC’s gross margin has been just over 18%, about 50 basis points below that of STX. A longer-term outlook, however, shows that WDC has increased gross margins by over 300 basis points during the last three fiscal years, whereas STX has experienced a decline in gross margins by approximately 450 basis points during that same time. · Looking at operating margin, WDC has increased the TTM vs. FY2004 number by 350 basis points to 8.5%, whereas STX’s operating margin has shrunk 250 basis points in that time to a meager 4.7%. This difference can be attributed to Western Digital being the leader in desktop HDD, where pricing is less competitive than in the laptop arena. · On a peer-comparable valuation basis, WDC trades for 4.6x EV/EBITDA and 0.587x EV/Sales, with STX at 9.3x EV/EBITDA and 1.18x EV/Sales despite having lower margins on those sales. · Currently trading at 8.2x trailing EPS, Western Digital commands a consensus five-year EPS growth rate of 11%; given the enormous demands for data storage in an increasingly digitalized world, we believe that 11% rate underestimates the true growth potential of Western Digital. In the fastest-growing markets, WDC does not yet have a significant presence, something it is aiming to change with entry into the 1.x” market mainly composed of consumer electronics. · Given Western Digital’s anticipated earnings growth, its balance sheet position, cash flows, and business risk, our fair value target for WDC is $20.70, putting WDC shares as being undervalued by approximately 25.5% based of Tuesday’s closing price of $16.50.
Disclosure: The analyst has no position in WDC or its derivatives. |
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