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Technology Stocks : Western Digital (WDC) -- Ignore unavailable to you. Want to Upgrade?

To: Sarmad Y. Hermiz who wrote (10943)	7/30/2004 9:00:04 AM
From: Alastair McIntosh	Read Replies (1) \| Respond to of 11057

Pricing Rears Its Ugly Head, Again; Reducing Estimates and TP to $10 (from $12) • Western Digital reported better than expected 4Q04 revenue of $749 million versus the Street's expectation for $710 million but EPS of $0.14 missed consensus expectations by a penny. • Strong Revenue but Aggressive Pricing. The strong revenue performance was the result of share gains at Dell (DELL, Not Rated, $35.26) due to product quality issues at competitor Maxtor (MXO, $4.60, Neutral [V], target $5.50, Market Weight), however, an overly aggressive pricing environment in the desktop channel and a higher mix of OEM revenue drove gross margin to 13.5%, below our estimate of 16.0% for the quarter. • Outlook. WD believes the pricing environment remains uncertain and is completely dependent on drive vendors delivering product builds inline with demand. Given the disparities in C3Q unit outlooks among the top three desktop vendors, we believe another quarter of overproduction is likely. • Lowering Estimates and Price Target. We are lowering our FY05 EPS to $0.55 from $0.89. Our FY05 revenue estimate remains at $3.1 billion (0% y/y). We are also lowering our price target to $10 from $12; our new target assumes a revenue multiple on forward sales of 0.7x. In after hours trading, WD was trading at 0.55x forward sales, slightly above its historical average of 0.4x. • Conclusion. WD remains the best performing hard drive company in a very difficult environment and the stock to own for investors looking for exposure to the hard drive market. However, with a difficult pricing environment continuing into the second half of the year, we expect the hard drive stocks to perform in line with the broader market as investors adopt a wait and see approach. from CSFB