Western Digital Corporation (WDC)
See also: Western Digital Corp (WDC) - 1 Year Later
I purchased a handful of Western Digital (WDC) shares today. Their fundamentals look strong and the price of the stock appears undervalued. Although I am uncertain of how strong the company’s durable competitive advantage is, they do have an excellent brand name. I use WD drives in my own computers and would use them exclusively if given the option.
Pros
- Consistently positive equity growth for the last 7 years, 47% median. Continued growth at 35% for five years would put the book value per share at $80.08 in 2015. A stock price of only 1x book value would represent an annualized return of 21% from today’s price of $31.40. The stock typically trades from 4x to 8x book value.
- Strong and consistent return on equity, 37% median. I consider ROE to be a company’s sustainable growth rate. WDC is employing their capital to great effect and growing their revenue well.
- Current TTM P/E is 5.5, typical low is 8, and usually hovers around 10 with occasional pushes up to 18. With earnings around $6, pushing back up to a P/E of 8 should lift the stock price to $48, a 52% gain.
- Retained earnings from 2002 to 2009 of $12.95 have produced 2010 earnings that are $6.03(E) higher than 2002, a 46% effectiveness of reinvesting in the company.
- Long term debt has consistently been kept under 1x net income.
- Standard & Poor lists WDC as a 5-star pick with a 12-month target price of $55.
Cons
- While the annual earnings growth has been good (median 42%), it has dipped twice in the past 7 years.
- They sell the same physical hardware as their competitors. What they can’t make up in brand name and service level, they must discount in price. Their product is constantly endangered by innovation. They’re in a price-competitive business without a rock-solid durable competitive advantage.
- I’m not certain that they can raise their prices with inflation. High pricing pressure may incite B2B partners to look for lower prices elsewhere.
