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Strategies & Market Trends : Value Investing -- Ignore unavailable to you. Want to Upgrade?

To: Paul Senior who wrote (51977)	8/2/2013 12:44:37 PM
From: IndependentValue	Respond to of 78652

Hi Paul, Thanks for the welcome! “My view: stock could/should/might, in an okay tech market, sell for about a 10x earnings.” I think a 10x multiple on cash earnings (FCF) is an undemanding valuation for the business on a number of counts: - The HDD game has changed somewhat now that it there is a clear duopoly, compared with even five years ago; greater pricing power should help protect margins - After the persistent undervaluation for the business over the last number of years, an eventual appreciation of WDC’s stellar 10 year track record should see the investors re-rate the business with a higher multiple – as Graham says, [quote on earnings track record] - Looking at the high growth data storage businesses with positive cash-flow, EMC and SanDisk trade at 17x and 117.8x cash earnings – while not as strictly comparable to WDC as STX for example, these are relevant when assessing the enterprise and SSD components of WDC’s business - The growth outlook for the business and the sector is strong, which should warrant a higher multiple; data growth is a secular story, with exabyte storage demand expected to grow at 30%+ per annum to 2020; - Based on all the above, a 10x multiple seems reasonable for WDC I also don’t’ pay much attention to EPS when talking about valuation, since WDC’s cash earnings have historically exceeded net income (therefore the company has real earnings quality), and with buy-backs and share repurchase programmes, EPS makes the business’ actual earning appear more volatile than they actually are. I think looking at the entire business on an EV/FCF measure makes more sense. So when I’m taking about 10x earnings, I really mean 10x EV/FCF. With regard to the D/E ratio, nothing to be alarmed about here at all, WDC remains in a net cash position, with a stronger balance sheet and FCF generation than STX at present. The additional debt was assumed to acquire HGST, rather than repatriate overseas cash to acquire it. On Tilson, I haven’t read much of his commentary, just came across the “I missed it” piece in his Value Investing Conference presentation from last May posted online. What don’t you like about his analysis/commentary?