The last time we wrote about Western Digital was in March 2009. At the time, WDC was trading at $17.21 and we provided a twelve month target price of $44.27. In retrospect, our estimate of value seems a mite aggressive. However, the market has vindicated us the recent price of $39.43 is awfully close to our target. Looking ahead, we have a twelve month target price of $52.81.
Western Digital Corporation (WD) designs, develops, manufactures and sells hard drives. The Company sells its products worldwide to original equipment manufacturers (OEMs) and original design manufacturers (ODMs) for use in computer systems, subsystems or consumer electronics (CE) devices, and to distributors, resellers and retailers. Its hard drives are used in desktop computers, notebook computers, and enterprise applications, such as servers, workstations, network attached storage, storage area networks and video surveillance equipment. Additionally, its hard drives are used in CE applications, such as digital video recorders (DVRs), and satellite and cable set-top boxes (STBs). WD also sells its hard drives as stand-alone storage products and integrates them into finished enclosures, embedding application software and offering the products as WD-branded external storage appliances. On March 27, 2009, it completed the acquisition of SiliconSystems, Inc.
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By The Numbers
Quarterly sales for the last four reported quarters show consistent improvement. For the quarter ending 03/09, sales stood at $1,590.0 million and compared to $2,111.0 million in 03/08. In each of the subsequent quarters, sales increased so that by 10/09, sales were ahead of the prior year quarter. For the twelve month period ending 01/10, sales stood at $8,348.0 million as compared to the equivalent prior twelve month period of $8,036.0 million, a 3.9% gain.
The decline in the sales growth rate can be attributed to a lack of pricing power in today’s environment. Historically, sales grew at a rate of more than 19%. The company continues to add new products and there is increasing momentum in quarter over quarter sales growth. Reuters reports consensus estimates for FYE 06/10 at $9,814.38.
Over the past four quarters, earning reflected the decline in sales and the same pattern of picking up when sales turned around. In the quarter ending 03/09, EPS came in at $0.22 compared with $1.23 in 03/08. Earnings picked up in each subsequent quarter so that in 10/09, EPS was reported at $1.25 as compared to $0.93. In 01/10, quarterly EPS was $1.85 as compared with $0.06 in 01/09. EPS for the twelve month period ending 01/10 totaled $4.18. In comparison, in the one year ago period, EPS totaled $3.16. Consensus EPS for FYE 06/10 is $6.03.
Gross margins for the TTM are a strong 21.8%. Reported gross margins in FY09 were down to 17.9%. For the five year period 07/05 – 07/09, gross margins averaged 18.24%. Similarly, operating margins popped in the TTM to 12.7% from FY 09’s low of 7.0%. Again, net margins reflect the same trend spiking to 11.5% in the twelve month period ending 01/10 from FY 09’s margin of 6.3%. Historically, WDC reports a net margin in the 9.0% - 10.0% range.
Historically, WDC underperforms its industry median when measured by gross margins. However, when it comes to operating margins and net margins, WDC significantly out-performs. This reflects well on management’s ability to control costs. Return on Equity at 28.1% and Return on Assets at 17.0% are higher than industry medians. In fact, with the exception of FY 09, ROE is typically near 40.0%. In every year, WDC reports ROE and ROA that beats the industry median.
The company has a strong balance sheet. The Current Ratio is 2.2X and Total Liabilities to Total Assets is a moderate 39.4%. Long term debt stands at $350.0 million. Long Term Debt to Capital is 8.1%. Cash and short-term investments total $2,435.0 million or 27% of the recent market price.
We see continued growth for Western Digital and believe it is currently undervalued. We are establishing a target investment value of $52.81 which translates to 8.76X estimated earnings of $6.03. After the run-up on the past year, we will be satisfied for an addition 34% gain.
Disclosure: Author has a long position in Western Digital.