Can Western Digital Keep Rallying?

I'm a believer in growth stocks. As an analyst for our Motley Fool Rule Breakers service, I think you should be a believer too. But even I have to admit some growth stories are bogus, hence this regular series.

Next up: Western Digital (NYSE: WDC  ) . Is this maker of hard drives and other storage gear the real thing? Let's get to the numbers.

Foolish facts

Metric

Western Digital

CAPS stars (out of 5)

****

Total ratings

1,365

Percent bulls

94.5%

Percent bears

5.5%

Bullish pitches

200 out of 213

Highest rated peers

EMC Corp. (NYSE: EMC  ) , Seagate Technology (Nasdaq: STX  ) , SanDisk (Nasdaq: SNDK  )

Data current as of Sept. 25.

Data storage is big business. According to the latest data from researcher IDC, the worldwide market for storage reached $3 billion in the second quarter, up 3.3% over last year's Q2. Western Digital is no bit player in this market. Plus, the stock is cheap.

"Hard drive makers are seeing insane valuations right now. Fact is, the threat of [solid state storage] is overblown. I don't deny that SSD's will have their place, but there still needs to be cheap ways to store data, especially in large enterprises. [Western Digital] trades at around 3.5 X EV/FCF, despite having a favorable outlook. That bargain basement price isn't deserved," my Foolish colleague, Eric Bleeker, wrote in July.

Equally interesting in the premium prices being paid for storage technology. Consider the $2.1 billion Hewlett-Packard is paying for 3PAR (NYSE: PAR  ) . The message? Even good data storage concepts are worth more than they were a few months ago. At some point, this truth is likely to be reflected in the pricing of Western Digital's shares.

The elements of growth

Metric

Last 12 Months

2009

2008

Normalized net income growth

152.4%

(41.2%)

135.4%

Revenue growth

32.2%

(7.7%)

47.7%

Gross margin

24.4%

17.9%

21.5%

Receivables growth

35.6%

(8.3%)

44.9%

Shares outstanding

231 million

225 million

224 million

Source: Capital IQ, a division of Standard & Poor's.

Or at the very least, investors should recognize the improving financial trends as reflected in this table. Let's review:

  • After a breather in 2009, Western Digital is once again seeing triple-digit gains in normalized net income.
  • What makes this interesting is that it's coupled with a healthy rise in revenue. Also, receivables and revenue growth are tracking about even -- a sign that Western Digital is able to convert invoices into dollars.
  • Most of all, I like the margin improvement. Not only are Western Digital's gross margins up over last year, but also over 2008 levels.

Competitor and peer checkup

Competitor

Normalized Net Income Growth (3 yrs.)

EMC

6.9%

Hitachi (NYSE: HIT  )

9.1%

NetApp

20.8%

SanDisk

39.4%

Seagate Technology

34.2%

STEC (Nasdaq: STEC  )

26.5%

Western Digital

51.7%

Source: Capital IQ. Data current as of Sept. 25.

According to this table, Western Digital is the best growth story in storage. That's saying something. SSD leaders SanDisk and STEC are in this table, as are Western's chief hard disk drive rivals: Seagate and Hitachi. Color me pleased.

Grade: Sustainable
Mix in the balance sheet strength to which Eric refers -- Western Digital had $2.73 billion in cash versus just $400 million in debt as of this writing -- and you've got a cheap stock with the resources to compete for the pole position in its market. As such, I've rated Western Digital to outperform in my CAPS portfolio.

Now it's your turn to weigh in. Do you like Western Digital at these levels? Would you make it one of our 11 o'clock stocks? Let the debate begin in the comments box below, and when you're done, click here to get today's 11 o'clock portfolio pick.

You can also ask Tim to evaluate a favorite growth story by sending him an email, or replying to him on Twitter.

For further Foolishness featuring Western Digital:

True to its name, The Motley Fool is made up of a motley assortment of writers and analysts, each with a unique perspective; sometimes we agree, sometimes we disagree, but we all believe in the power of learning from each other through our Foolish community.

Fool contributor Tim Beyers is a member of the Motley Fool Rule Breakers stock-picking team. He didn't own shares of any of the companies mentioned in this article at the time of publication. Check out Tim's portfolio holdings and Foolish writings, or connect with him on Twitter as @milehighfool. You can also get his insights delivered directly to your RSS reader. The Motley Fool is also on Twitter as @TheMotleyFool. Its disclosure policy thinks Monty Python is sustainably funny.


Read/Post Comments (2) | Recommend This Article (2)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On October 06, 2010, at 12:59 PM, jrmart wrote:

    GREAT ARTICLE

    Hard drive storage technology companies like Western Digital and Seagate will continue to sell their products because enterprise storage demand is steadily increasing. These companies can still provide some real nice investment opportunities.

    Unfortunately, Wall Street and also HP and DELL that just had a bidding war for 3PAR are putting more emphasis on leading edge solid state enterprise storage technologies like STEC.

    STEC now supplies 3PAR, IBM, EMC and lots of other companies with their Zeus enterprise solid state drives. There were rumors saying IBM was going to buy STEC. Next it was DELL. I think the more likely buyer would be either Seagate, Western Digital or Hitachi. It would be easier and faster for anyone of these companies to buy STEC for their existing leading edge solid state enterprise drive technologies than to develop their own.

    Wall Street also favors Apple because they use solid state drives from SanDisk in their state of the art wireless IPAD which is being sold by the thousands into the corporate world.

    Apple controls the world of wireless consumer devices by introducing leading edge state of the art products. The other companies then follow with JUST ME TOO products.

    Liquid Metal Technologies, Inc. stated in their 8K on August 11, 2010, that Apple bought a lifetime license with exclusive rights to manufacture electronic devices using Liquid Metal.

    Could Apple use Liquid Metal to make new extremely sleek and aesthetically pleasing IPADS, IPHONES, and IPODS that are virtually indestructible?

    Today's leaders stay in front of the pack by using unique state of the art products, not old existing technologies.

  • Report this Comment On October 06, 2010, at 1:09 PM, mtf00l wrote:

    I for one, am a huge fan of Western Digital. They have there share of false starts however, they have always, yes always stood behind their products for me. Even going above and beyond from time to time. Solid State isn't quit mature yet. I suspect some other technology will come along to render both obsolete however who knows when that will happen. I'm sure Western Digital will be there for that evolution as well.

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