Looking at the declining price of WDC today, I have two thoughts. First, unless the demand for WDC hard drives collapses altogether, and unless there is no short term growth in demand for SanDisk SSD products, I think the current price of WDC is fairly valued, if not actually discounted.
Second, the price of WDC may be undervalued, owing to the negative recommendations of major investment firms such as Bank of America Merrill. It is a standard practice nowadays for investment firms to downgrade stocks they want to buy at a better entry point. This has happened numerous times with SanDisk, Qualcomm, and other stocks I follow. It's probably happening now with WDC.
The reason I like WDC at its present price, however, (and have accepted new WDC shares from the acquisition of my remaining SNDK holdings) is that, even with no improved results either for WDC or its SanDisk subsidiary, the combined company appears to have sufficient cash flow to cover operating expenses, debt service costs, and dividends at the current rate. The current yield on WDC shares is tempting enough to justify holding the shares or even buying more at the present price level.
One statement in the recent BOA rating of WDC that I thought was especially significant was their view that SanDisk products might now be less competitive because of the strengthening of the Japanese yen. This is really a ridiculous view, because the yen devaluation was so great that it easily made SanDisk products from its Japanese fabs highly competitive on world markets. You would have to see the yen value increase from its current 108.7 to the dollar to about 98 to the dollar before there would be any measurable change in profit margins based on the exchange rate. Meanwhile, the SanDisk acquisition of Fusion-io gave them a foothold in the enterprise server market, which meshes almost perfectly with WDC and its growing position in that market.
I also am skeptical that competitors such as Samsung, Hynix and Micron can match SanDisk SSD products in price and performance, notwithstanding claims that some Samsung products have faster performance. It appears that, from the albeit incomplete data we have on margins of these competitors, SanDisk is still the low cost producer.
For these reasons, I disagree with the lukewarm views of investment firms that may have an ulterior objective in downgrading WDC. |
