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Leigh Baldwin & Co.

112 Albany Street, Cazenovia, NY 13035 | Phone: (315) 655-2964 Toll Free: 1-800-659-8044

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Stock of the Week

Western Digital

February 8th 2015

Western Digital                

NYSE Symbol : WDC

Industry: Disc drives

Price as of 2/6: $103.40


A little more than a month in to 2015 and the broader markets have gone nowhere. For a second straight year, January produced lousy returns falling over 3% after dropping over 6% last year. Global weakness and the strong dollar are hurting multinational and commodity related companies. One of the few bright spots, our featured stock, Boeing jumped 20% after beating earnings estimates. Apple and Disney have also been standouts, but overall most stocks have dropped following fourth quarter earnings. The price of oil has bounced in the last week lifting the oil stocks while the airlines have sold off. Going forward I wouldn't be surprised to see oil and commodity related stocks go back down dragging the broader market with it. It's getting tougher and tougher to find stocks that are poised to move higher. With the January pullback, you'd like to see management step up and take steps to show shareholders their stock is cheap. Last October we highlighted Seagate after the company hiked their dividend 26% and boosted their share buyback. The stock proceeded to rally 20% before pulling back again. Seagate looks very attractive once again. Boeing took similar measures in December boosting their dividend 25% and augmenting their share buyback. This week's stock made a similar move on Tuesday. The stock of the week is Western Digital. Seagate's largest rival, Western Digital reported better than expected earnings last week before hiking their dividend 25% this week. The yield at 1.9% is not as compelling as Seagate's yield of 3.6%, but the growth prospects are better and the strong cash flow should help the stock hold up well in any market downturn. Besides the dividend hike, Western Digital also announced a $2 billion share buyback for roughly 8% of the outstanding shares. Any pullback in the short term will reward shareholders in the long term.

Western Digital Corp, the world's No. 1 hard-disk drive maker, reported second-quarter results slightly ahead of Wall Street expectations on strong demand for its solid-state drives from enterprise customers. Western Digital's net income rose to $460 million, or $1.93 per share, in the quarter ended Jan. 2, from $430 million, or $1.77 per share, a year earlier. On an adjusted basis, the company earned $2.26 per share, above the average analyst estimate of $2.10, according to Thomson Reuters. Revenue fell 2 percent to $3.89 billion, but topped the average analyst estimate of $3.84 billion. The company's enterprise sales of solid-state drives rose more than 20 percent to $187 million in the second quarter. The enterprise solid-state drives are faster and more reliable than traditional disk drives and carry higher margins. Every solid-state drive sold equates to 4 to 6 desktop (PC) drives sold. Going forward, Western Digital forecasted the current-quarter adjusted profit of $1.90-$2 per share on revenue of $3.6 billion to $3.7 billion in line with expectation as the company continues to expand their full portfolio of compelling, high-quality storage products into the growing market for cloud data storage products. This move has helped Western Digital and Seagate combat continued weakness in the PC market.

The valuation of Western Digital remains compelling at current levels. The stock trades for 12 times 2015 earnings and 11 times 2016 earnings. The stock also trades for just 1.6 times sales. Cash and cash flow continue to build. Currently the company has over $5 billion in cash and over $3 billion net cash  after subtracting  out debt. The company is also generating roughly $2 billion in free cash flow a year to help provide dividend hikes and more share buybacks down the road. The analyst community remains bullish on Western Digital. RBC has a $122 price target, Needham has a $124 price target while Brean Capital has an ambitious price target of $150. This current investing environment is getting tougher and tougher, but companies like Western Digital with strong earnings and strong cash flow should hold up well and prosper once the markets start moving higher once again.