Western Digital Corp (WDC) - 1 Year Later
See my original post here: Western Digital Corporation (WDC)
Western Digital is another company I purchased last year but sold soon after for fear of a market downturn. Again, it was the wrong decision. I wrote in July about expecting annual growth in book value of 35%. The stock was priced at $32 in July 2010, today it’s at $41, a 28% increase. My 2010 expectations were:
Book: $17.79 per share
Earnings: $2.81 per share
Actual 2010 results were:
Book: $19.37 per share
Earnings: $5.93 per share
The earnings growth was over the top at 185% and isn’t expected to continue. In fact, Standard and Poor’s expects 2011 earnings of $3.01. That number isn’t great but it would still be a 21% annual growth rate from 2009 to 2011. It would also represent very close to a 12% return on book value. It will be a year to watch closely. If return on book value goes below 12%, that is a red flag.
I’m sticking with my expectations of 35% growth in book value. For 2011, I’m looking for:
Book: $26.15 per share
Earnings: $3.14 per share or better (12% of book or better)
Price: Who knows!
With their earnings swinging, it’s difficult to price the stock using a P/E ratio. Their current P/E of 11.5 would result in a price of $36. In 2010, their price to book ranged from 1.8 to 3.6 times book. If that range sticks and a book value of $26.15 is achieved, the price range would be $47 to $94. Those numbers are opposed to Standard and Poor’s 12-month outlook of $36, based on price to sales and price to earnings estimates (S&P is expecting a tough year due to a possible market shift to solid-state drives.)
All-in-all, Western Digital still seems like a good company to own if already owned, but not something I would jump in and buy today. The year ahead could be bumpy and might indicate future difficulty. I’m not going to re-purchase WDC but I’m definitely going to keep them on the radar. If the price dips below $35, I will re-evaluate. Such an event could be a good buying opportunity or could signify deteriorating business conditions.
Something interesting to note. WDC has continually grown their book value every year. It has never dipped. Its median annual growth is 47%. If they continue the trend and their book value grows by 35% for 5 years, their 2015 book value would be $86.86. Every stock trades for a price of at least their book value and only that low when the company is going bankrupt. A stock price of $86.86 in 5 years represents a yearly gain of 16%.
