Is WDC Cheap? by D Klein 08/09/2010


Here’s another that appears attractive – WDC or Western Digital Corp.  The sector is being beat up on fears of excess inventories, pricing pressures that squeeze margins, etc., but WDC seems to be a standout that may translate into opportunity even when taking into account a FY 2011 earnings drop to about $3.87.  I’m no techie but the financials and recent comments seem to justify a higher stock price.  The company is awash in cash.  What I do not like is they have no dividend, because I  believe dividends help limit the downside, but as the stock drops its becoming more enticing.  A quick check of 5 year growth rates yields:  Revenue 22% : Operating income 51% : Free Cash Flow 41%.  They finished  FY 2010 with cash of about 2.7 billion an increase of about one billion over FY 2009.  A current ratio of 2.33 and liabilities to equity of .56.

Management’s forecast going into the next quarter also doesn’t justify the pummeling the stock is taking. (For a full transcript click here)
we expect current quarter revenue for WD to be in a range from $2.350 billion to $2.450 billion.  R&D and SG&A are expected to total approximately $235 million. Our net interest expense is projected to be about $1 million. We expect our tax rate to be about 7.5%. We anticipate our share count to be approximately $236 million. We estimated earnings per share between $0.80 and $0.90 for the September quarter.” The current PE is under 5 but more importantly the forward PE is about 6.5.  I get a fair value of 39 so WDC is presently trading at a discount of about 35%. 

A summary of some of the data I collected/calculated leading me to this opinion is at:
http://kleincody.web.officelive.com/tempdataForWebWDC.aspx

I’m also assuming that the world economy will eventually improve but that’s another topic.

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