GS on Western Digital Corp. (WDC): In spite of a few bruises, WD's results probably provide some relief
What's changed
WD's June quarter results probably provide some relief for hard drive stocks which have been peppered recently by negative data points. Though WD's pricing was a little worse than expected, down 6% qtr/qtr, below-target gross margin was firmer than the price decline would suggest and units were solid, providing some evidence that investors' worst fears about the industry haven't materialized. July and August are likely to be tough, following typical patterns, but checks still point to a normally seasonal second-half of the year which should provide support for the drive stocks.
Implications
WDC shares should firm up after dropping 11% in the past week. Although the results probably aren't enough to recommend buying the shares near term, they are good enough to give the stock some support in light of WD's low share price and low expectations. At the same time, the company's internal options review will create an overhang that is unlikely to be resolved quickly. We are slightly tweaking our estimates due to more conservative pricing and gross margin assumptions.
Valuation
As one of our mature stocks, WDC's 12-month target price is based on a combination of target earnings multiples, cash flow metrics, and DCF. With our new estimates, we are rounding our price target to $21.50.
Key risks
On the upside, larger share gains from Seagate/Maxtor would drive revenue and margins higher. Conversely, excess supply would cause pricing, revenue and margins to fall below our current forecast.
Impact on related securities
We continue to favor STX shares in the HDD space because of its greater leverage to a seasonal pick up in PCs, in the back half of the year, and ongoing share gain opportunities in notebook and consumer electronics drives. Our early upgrade of STX on 7/20 was partly based on our view that HDD stocks should be bought before industry conditions turn positive, with WD's results potentially marking a bottom from a sentiment point of view. Seagate's 8/8 earnings take on added importance since it comes on what may be the earliest stage of improving seasonal demand. |
