Re: Price targets
You said:
Pierre: With the information that you have given, how would you set the fair market value and 1998 target prices for WDC?
_ Fair market value is a tricky concept.
_ Here's what I expect to see. A multiple of 10 times the $1.50 low-side guidance equates to a short term (3-6 months) price target of $15. It could go even lower depending on how 2QF98 shapes up. As I've said before, it appears that the critical factor determining THIS quarter's results for WDC will be pricing behaviour from Fujitsu and Samsung. This assumes that Seagate has finished working off their excess inventory.
_ Heres my breakdown regarding 98 share price targets:
Scenario 1: WAR -- Target price: $15 (or less!)
Subjective probability: 15%
Observers of retail pricing may have noted that Maxtor is pricing for market share growth as well. With Maxtor, Fujitsu, and Samsung all chewing at the pie we may have another all out no-holds-barred hack-off-the-limbs-and-leave-em-bleeding price war like in the bad old days (late 80s early 90s). IF THIS HAPPENS then 98 share price targets are pretty grim -- we could see further erosion of WDC earnings and associated decline in share price. In this worst case scenario, it doesn't matter how well managed the company is, or how good the reputation of the brand, or what have you. All DD firms WILL GET HAMMERED. SOME FIRMS MAY GO OUT OF BUSINESS. This means WDC share price under $15. The only survivors in wars like this are deep pockets and lean, efficient organizations. I think Seagate has the weakest position in case of war. IBM is not lean but they have deep pockets. Quantum has DLT to keep bread on the table.
Scenario 1b: Skirmish -- Target price: $20
Subjective probability: 15%
This scenario is a less intense version of Scenario 1. If the DD producers implicitly agree to a "gentleman's war" where extreme actions are forbidden, WDC could make around $2 in 98. Applying the historical multiple of 10 gives a price target of $20. The generally unfavourable circumstances surrounding the intense competition, however, will likely keep the multiple from rising to the historically high range.
Scenario 2: Output Collusion -- Target price: $30
Subjective Probability: 20%
Another possible scenario could arise from a broad industry consensus, either implicit or explicit, to restrict production to control price erosion -- this is known as a cartel. Some industry observers have suggested this scenario based on Haggerty's comments about "17% production cutbacks". Well, For a cartel to succeed, all the major producers have to play ball. In my OPINION, the Asian drive makers won't play. Historically, Asian companies have exhibited predatory behaviour when engaging export markets e.g. automobiles, DRAM, motorcycles, televisions. So I consider Scenario 2 unlikely.
_ By the way, cartels are considered anticompetitive collusion, and therefore illegal in the U.S.
Scenario 3: Asian Withdrawal
Subjective probability: 0%
The shaky economic climate in Asia has led some to conjecture about the possibility weakening Asian DD raiders. Sorry this is exactly wrong. Depreciating currencies overseas make exporting MORE attractive, not less.
Scenario 4: Demand Side Explosion -- Target price: $40
Subjective probability: 20%
It's possible that the introduction of Win98 and NT5 next year could spark mass migration of corporate Win3.1 desktops to 32 bit, with a commensurate explosion in storage demand. This actually happened to the DRAM market when Win95 came out -- take a look at the chart for MU share price in 95. In this scenario the shifting demand curve consumes whatever oversupply and overcapacity currently troubling DD makers, and puts upward pressure on pricing. Margins and earnings recover, and WDC nets over $3 for F98, propelling the share price to $40.
Scenario 5: Some weird crap that takes me by surprise
Target price: ??
Subjective probability: 30%
In this scenario something happens that I just have no idea about. It's certainly happened to me before, and I'm sure it will happen again (and again and again :PPP).
PX |
