Re: Dec-2 Announcement
Greetings to all.
Apparent confirmation of industry's position on the down leg of a cycle.
I view the actions announced by the company as a positive, correct response to events. Essentially, WDC wants to act aggressively to get out of the unprofitable segments of the business.
The Company will: further reduce production of desktop hard drives from previously announced levels
This is the correct response to oversupply and perhaps momentary overcapacity. There's no reason to produce drives if the company cannot maintain positive operating profit.
exit the 3-inch portable hard drive business and re-deploy resources into its leadership desktop storage business and the expanding opportunity in its enterprise storage business
I believe the enterprise segment has the best prospects for growth and profit margin, so I view WDC's redeployment pursuant to that end as positive. However, they will pay a price in terms of the morale of the personnel that worked on the 3" programs. On the flip side, WDC should be able to acquire some skilled personnel to directly address increased efforts in enterprise products from the erstwhile Micropolis.
further accelerate its transition to desktop and enterprise hard drives featuring magneto-resistive head technology
This bodes more ill for TFI capacity at the component suppliers. Good thing I ditched my APM a while back.
Company indicated that its currently-forecasted operating results (before the planned one-time charges) would be break-even for the second fiscal quarter ending December 27, 1997
This is the third time in two months that WDC has lowered their guidance. Strong evidence that the competitive situation continues to worsen, and the party days for the DD industry are over. The situation has eroded more quickly than management's worst case scenario (20 cents for the quarter).
Assuming Dec quarter results of breakeven, TTM EPS will be $2.50. Assuming the same for the Mar quarter will result in TTM EPS at that time of $1.62. What "modestly profitable for full fiscal year" means is subject to interpretation; undoubtedly below the original $1.50 guidance. Once again assuming zero EPS in the Dec quarter = 67 cents at mid year; assuming WDC is able to stay in the black my guess at F98 is anywhere from $0.67 to $1.00.
That means my earlier short term price target of $15 is not only feasible, but even on the high side of the probable range.
Look for another string of downgrades and earnings revisions.
Peter Lynch alleges that some of the best buys are strong players in weak businesses. Usually the weaker participants in the weak business exit, leaving more for the strong who survived. I think WDC fits that bill to a T. However, I would wait until the fundamentals turn around. The only exit we've seen recently is Micropolis. Out of the remaining players, my wagers on the next several players to quit in order of likelihood are:
1. JTS
2. Hitachi
3. SGS Thomson
4. Samsung
5. Low end product lines at Seagate
I would DEFINITELY NOT rate WDC a buy today. The knife is still falling.
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