To: oldbeachlvr who wrote (78641 ) 1/21/2018 10:02:33 AM From: oldbeachlvr 2 RecommendationsRecommended By
Read Replies (1) | Respond to Continued from previous post: Paul Wick also likes Western Digital and Marvell:What else do you like? Wick: Western Digital is the old Western Digital magnetic disk-drive company that competed with Seagate Technology [STX] before acquiring SanDisk. The way to think about the company is, it is half disk drive and half flash memory. I recommended Western Digital, along with Micron, in an interview in Barron’s in April . Micron is up significantly since, whereas Western Digital has gone sideways. Part of that is NAND flash prices have been fairly flat, and recently softened slightly. Also, Western Digital got into a dispute with its joint-venture partner, Toshiba , over Toshiba possibly selling a stake in Toshiba memory to either Western Digital or other companies. They’ve buried the hatchet and extended the terms of the joint venture out to 2029, I believe.Show Everyone's Picks What does the balance sheet look like? Wick: Western Digital has a lot of debt on the balance sheet, but the company generates a prodigious amount of free cash flow per year—north of $3 billion a year. They have some high-cost debt, and will significantly delever the balance sheet in the next couple of years. They even have some debt that has 10% coupon rates on it that’s callable in April 2019. That will get called. You are going to see share repurchases, as well. The valuation is just too low. Again, there is a perception that if flash prices fall, somehow the P&L [profit and loss] statement of the company has to get obliterated.How high could Western Digital’s stock go from here? Wick: The stock could go to $120. It is amazing to me that Seagate trades at a premium to Western Digital, given that Seagate is pretty much a pure magnetic disk-drive company. Inevitably, over time, magnetic disk drives are going away. At least with Western Digital, they have future-proofed the company to some degree by having flash memory as well as magnetic storage.Marvell Technology Group [MRVL] is another chip company we like. Marvell had a management change a year and a half ago. The founding CEO was pushed out, along with his wife. They were optimistic about a lot of research-and-development projects, and they had a lot of dry holes, including a baseband processor business into which they sunk hundreds of millions of dollars and got nothing in return.Maxim Integrated [MXIM]. In just two years Marvell’s gross margin has gone from 53% to 61%. The R&D spending that had been 36% to 40% of revenue is now 30%. And the operating profit margins, which had gotten as low as single digits, are now back up in the high-20% area. It has been a pretty solid turnaround. They’ve divested some unprofitable businesses and executed well.Tell us more about Marvell’s products. Wick: Marvell makes disk-drive controllers for both magnetic disk drives and solid state drives. This is a high-margin business—maybe as high as 70% gross margins. That’s about 55% of the company’s revenues. They also have a connectivity business, making Wi-Fi, Bluetooth-type products, mostly for game controllers. Microsoft Xbox is their marquee customer. Then they have a networking chip business that has lost share for the past decade to Broadcom [AVGO]. It recently has been doing better but had been sinking for a long time.Cavium [CAVM]. Cavium has been one of the best network processor companies in Silicon Valley. It has processors for wireless infrastructure equipment, security firewall appliances, and enhanced security of data centers. Cavium has a fast-growing ARM microprocessor family called Thunder X that has gained traction at a few cloud customers. The company has ethernet switch chips, and a year and a half ago, it bought QLogic, which gave it ethernet and fiber channel adapters. That will be synergistic with Marvell’s storage-related business.What does the balance sheet look like? Wick: Marvell has $1.7 billion or $1.8 billion of cash, and is paying about $5 billion for Cavium—half cash and half stock. It ended up taking on debt, but it is manageable.
