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12:22 pm
January 12, 2011
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itconsultant
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| Member | posts 34 |
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FPA Capital is long WDC. Here is their thesis
http://www.gurufocus.com/news……?id=119377
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9:07 am
January 12, 2011
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GloryDaze
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For what it's worth, netting out the cash from the valuation is debatable. As noted, WDC is the beneficiary of attractive tax holidays since they manufacture out of SE Asia. Consequently, that cash is subject to penalizing US taxes if repatriated back home. Which is probably why STX recently issued incremental debt to repurchase stock. Why didn't they use the existing cash on their balance sheet…? Point is that the cash may not be as flexible as one would imagine. That said, totally agree that WDC is the best managed of the bunch across a variety of financial and operational metrics.
Also, as an aside, a few have mentioned that there's a risk that SSDs canabalize HHDs. May be the case over time but worth noting that not only are there material cost advantages with HHDs, but possibly more importantly, smart-phones may actually be constructive for HHDs in the sense that apps need to be stored somewhere, typically via HHDs.
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11:47 pm
January 11, 2011
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itconsultant
| | Irving, Texas | |
| Member | posts 34 |
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Post edited 10:51 pm – January 11, 2011 by itconsultant
I have done some work on this recently and think that WDC is the best managed company in the industry of hard drives. just check the performance over last 5 years. ROE has been north of 20% in most years despite such high cash balance.
The last two quarters were slow after 4 consecutive quarters of growth and high demand. So there is a bit of a lull or slow down. The long term demand for storage is immense as we all know with the amounts of photos/music/video we store and the sizes of these files.
The main fears are: price competition that will hurt margins, SSD sales will hurt sales of hard drives due to growth of IPad and other laptops that use SSD instead of hard drives. This remains to be seen.
Valuation wise analysts have $2.6 eps for FY 2011 down from $5.9 last year. Even at $2.6 and current stock price of $33, the valuation is cheap. WDC has $10 in cash. So that makes it 23$ for the business at 9x P/E.
WDC is the lowest cost manufacturer and according to everything I have read that is a MOAT.
Tax rates are low as manufacturing is in Thailand and Malaysia and WDC has tax holiday/ credit from these countries. US tax rate is 35% or so. I would expect rates to be low. blended 12% or so. 50% plus sales is in Asia.
Price of SSD is currently 10x of that of Hard Drive. Costs of both are dropping each year by 30% or so. I think SSD and HDD will co-exist for a long time. People like to say companies and technologies will die right away. I heard the same about DVD, Music CD, Books, TextBooks, GameStop :).
I conservatively value it at $42. Average earnings is about $3.2 and if you apply 10x and add the cash you get there. I would love to buy at mid 20s too but i dont mind the current price either.
The balance sheet is one margin of safety. $2.5 billion in cash. the low valuation is the 2nd. The management has combined 60 years of experience. ROE is high indicating moat.
One strategy would be to buy the stock and write covered calls out few months. You can sell a call at the $40 strike July 2011 at $1.2. Thats a decent return (26% in 6 months) if the stock runs up. If not, your cost price is reduced by the premium or you can consider it as a dividend (3.8%) over 6 months!
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3:34 pm
January 10, 2011
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Jae Jun
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I would definitely want it to get lower into the 20's before I consider buying. No moat, lots of competition, constant changes.
Too many variables to make a 1x1 risk worth it as glorydaze mentioned.
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4:52 pm
January 6, 2011
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GloryDaze
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Feels like reasonable downside is in the low $20s/share based on where the company's traded historically. Call it 1x book value. That's about $13 of downside dollars. Feels like $45-50/share is justifiable using blended multiples and conservative discounted cash flows. So call it $15 of upside dollars. That's about a 1x1 reward to risk relationship which seems dicey. Gets much more interesting in the upper mid $20s. Been looking at this on and off for several months and am kicking myself for not getting involved in the mid-$20s. For such a competitive and cyclical industry, even odds in terms of upside/downside feels risky. Feels like both Western Digital and Seagate have takeout premiums embedded in their prices. Thoughts?
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12:23 am
December 12, 2010
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Jae Jun
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Yes no moat in this industry but if price comes down low enough, then the opportunity is always there.
If the entire industry is in a cyclical trough, it makes the idea even better because everyone will be running from it.
There will always be a need to store data. I'll have to keep an eye on this.
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10:00 am
December 11, 2010
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avinv2010
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I have noticed that many storage manufacturers' shares are selling for cheap : not only WDC, but also STX, SNDK, IMN…
It might look like the whole sector is undergoing a difficult period. Even though I am not an expert, it seems to me that in this field no manufacturer has a moat, and the competition is done on prices.
What do you think?
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8:46 am
December 7, 2010
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Jae Jun
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I was actually looking at WDC again the past couple of days.
It is definitely cheap. Question is, is it warranted or just market overreaction over uncertainty?
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6:21 am
December 7, 2010
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Collin
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according to morningstar, another reason is people are expecting solid state drives to overtake HDD. think about the prices.
in my country, a SSD 256gb cost $899 while a HDD 250gb cost $78. SSD is at least 6~12x more expensive than HDD. You may argue that SSD prices are dropping. Don't forget, HDD prices are also dropping, if not dropping faster than SSD. IMO, SSD will not overtake HDD unless there is a new technology breakthrough.
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11:26 pm
July 25, 2010
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infinitee00
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I think the reason that WDC is selling at such a discount is because the market expects a price war amongst the 3 major HDD manufacturers- Seagate and Western digital (both of which have about a 30% market share) and Hitachi. This is going to further reduce gross and operating margins which will in turn yield lower PEs. Moreover since the memory prices fall such rapidly, The companies have to invest heavily in R&D and keep introducing new products regularly into the market to keep up their margins.
From a DCF standpoint, it definitely looks attaractive but I am not sure I agree with value line whether WDC (or for that matter the other HDD manufactuers) can maintain this growth rate for long. I will probably wait for it to fall a litle more to have a comfortable margin of safety.
Let me know what you think
Btw, Jae can you move this topic to symbol starting with W section.
Thanks
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12:26 am
July 23, 2010
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Jae Jun
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Do you know why the tax rate for WDC is always so low?
Is my calculation off or something?
But it looks like WDC has been performing great over 5 years compared to 10 years.
However, growth rate is slowing down if look at the 2007-2009 period but even with a 14% discount rate, intrinsic value still comes up to around mid $50's.
Haven't looked in depth at WDC but do they make solid state drives? I believe that's going to replace spin disk HDD very soon.
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12:48 pm
July 20, 2010
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kai fann
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welcome any opinion on wdc, hard driver maker.
WDC is trading a historical low P/E and Low P/B value. The intrinsic value is about $50-60 shares (I use more conservative 20% growth rather than 38% average growth rate). It is currently trading at $31-32 There is a margin of safety of 40-50%. P/E =5.0
as business and consumer recovered from the recession, there is increased demand for storage for various digital applications. Recent quarter from INTC suggests that PC industry is entering an upgrade cycle. Storage need is not far from behind.
From valueline, "the pricing environement should remain stable in the near term. The average selling price of hard drive increased by $1.00 during the march quarter. We expect Western digital to maintain better pricing leverage as the industry works through an inventory shortage. Recent consolidation should also work in its favor."
kai fann
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