Growth in store at Western Digital

6/23/2008


  Recent Price
$39
  Dividend
$0.00
  Yield
0.0%
  P/E Ratio
10
  Shares (millions)
227
  Long-Term Debt as % of Capital
17%
  52-Week Price Range
$40.00 - $18.34

As consumers worldwide complement their desktop computers with laptops, gaming consoles, mobile computing devices, and other electronic devices, the demand for memory in those items is growing rapidly. Western Digital ($39; NYSE: WDC) appears well-positioned to cash in on that demand by providing hard drives for a variety of end markets.

Computer users’ thirst for storage increases with time. As such, the proliferation of devices that house music, video, and photo files bodes well for Western Digital. The stock, with the maximum Quadrix® Overall score of 100, was initiated as a Buy in the June 9 issue.

Storage sets its own pace
Until five years ago, sales of personal computers (PCs) and hard drives roughly mirrored each other. But since then, hard-drive volumes have steadily outpaced personal-computer volumes, with consumers adding new computing devices to the ones they leave on their desks.

Western Digital estimates that the hard-drive market will grow at a 13% annual rate over the next five years. Some niches, such as servers and consumer electronics, could see annual growth of 20% to 40% during that period. Western Digital has aggressively targeted these new growth segments; revenue from hard drives not used for desktop computers reached 43% of sales in fiscal 2007 ended June, up from 29% in fiscal 2006.

Bucking the slowdown
Despite concerns that a global economic slowdown would pressure sales of PCs and other electronic devices, Western Digital says it has seen no slowdown in demand for storage. In fact, notebook shipments are on the rise, with volumes in the June quarter tracking higher than those in the March quarter.

Western Digital continues to take share in key markets. In 2006, the company controlled just 1% of the market for enterprise hard drives, one of its most profitable products. In the March quarter, Western Digital captured 10% of the market for enterprise storage.

In the 12 months ended December, Western Digital’s hard-drive volumes jumped 34%, more than double the 15% growth rate for the hard-drive industry. The company expects to continue growing faster than the industry as it presses into new markets.

Western Digital has made significant strides to control its costs. The company uses similar components for its products, providing it with lower purchasing costs, better inventory management, and quicker adjustment to shifts in demand. The September acquisition of Komag, which manufactures parts used in hard drives, gave Western Digital nearly full control of its supply costs.

Inexpensive growth
Western Digital has doubled over the last year on strong earnings growth, but the stock seems capable of reaching $47 within 12 months. Consensus estimates project per-share earnings of $4.18 for fiscal 2008 and $4.07 for fiscal 2009, up from $1.94 in fiscal 2007. Western Digital seems likely to exceed expectations, and the stock seems cheap at 10 times the fiscal 2009 consenus — more than a 40% discount to the average computer storage and peripherals stock. An annual report is available at 20511 Lake Forest Drive, Lake Forest, CA, 92630; (949) 672-7000; www.wdc.com.


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