Spekulatius/Paul Senior/Jurgis - And the mystery stock is: Western Digital Corporation (WDC)
Spekulatius, Paul, Jurgis – thanks for your responses. I’d like to address the points each of you raise in one post here if that’s ok, rather than replying piecemeal to each of you. Ok, long-ish post, so here goes…
Spekulatius: WDC’s business has required very little capex to grow, averages 6.4% of revenues over last 10 years, as revenues increased from $3 billion to $15 billion, with only one significant acquisition in that period, when Hitachi’s hard drive business was acquired in 2012 for $4.3 billion, resulting in about $1.9 billion of goodwill; goodwill balance prior to that topped out at just $150 million (on total assets of $8 billion pre-Hitachi acquisition); Hitachi acquisition was at c. 3x-4x EBITDA at most from what I can determine via online sources (wasn’t formally disclosed at the time), so I don’t think WDC overpaid on the deal. Multiples generally for HDD businesses were low in 2011/2012 due to view that PC was dead and so was the magnetic hard drive. Regarding your comment on the earnings multiple, WDC is currently trading at an EV/FCF multiple of c. 8x, and an EV/EBITDA of c. 4.5x – so not exactly expensive, but share price has rallied c. 80% in the last 12 months!
Paul Senior – I presented balance sheet and earnings information; please note I stated revenue, net income and FCF compounded growth rates in my initial post on this. To address your points re. stock price, over a ten year period it has risen from an average price of $10 per share in 2004 to $68 today – I prefer to look at market cap however, rather than per share which is easy to manipulate; on mkt cap basis, it was a $2 billion company in 2004 and is a $16.2 billion company today, so that’s a CAGR of 27% over the 10 years. But how does this square against retained earnings over the period, as a dollar retained should generate at least a dollar in increased market value right? Retained earnings have gone from a negative -$183 million in 2004 to about $7.6 billion at present; retained earnings didn’t turn positive until 2006, so taking CAGR from 2006 – today is 53%, so market value has not increased at the same rate as retained earnings – given the growth rates on revenues/net income/FCF I find this curious, and it leads me back to the declining ROIC/ROE trend (which nevertheless remains at c. 20%!)
Regarding the best margins, the HDD industry is now a 3 horse race, within which there is an effective duopoly with WDC (45% market share, Gross margins of 28%), and Seagate (STX), which has 41% share and 27% margins. Toshiba is the only other real player and it’s margins are masked by other non-HDD business lines so I cannot tell what true comparable business margins are. Pre-2011 before major consolidation, average HDD gross margins were c. 20%; after severe supply disruption due to flooding in Thailand (where a lot of manufacturing and supply chain plants are located) in 2011, margins were boosted on recovery in 2012 and 2013; however evidence suggests that post-flood margins of 28%-30% are sustainable given the duopoly becoming effective in 2012 as WDC bought Hitachi and STX bought Samsung’s HDD business (the only other significant player of scale). So consolidation has brought pricing power with the duopoly.
And regarding earnings multiples, as I mentioned above EV/FCF of c. 8x, EV/EBITDA of c. 4.5x – I think 10x – 12x would be an undemanding valuation as I believe there are growth prospects – please see a recent post on my site where I cover my thoughts - independentvalue.wordpress.com - the more I research and write about this business, the more attractive I think it is, despite the ROIC/ROE trend.
Jurgis – I think the above covers your comments!
Thanks for your thoughts guys, please come back to me on any points I've made, especially if you believe I've overlooked or missed something, or there is a flaw in my thinking! |
