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What will it take for Western Digital (NYSE: WDC ) to get some market respect?
Last night's third-quarter report sent Western Digital's shares jumping for joy to the tune of 5% above the closing price. There was good reason for the positive reaction: The hard-drive maker exceeded every expectation with $0.96 of GAAP income per share on $2.48 billion in revenue.
But then management used the conference call to make a few guarded comments about the coming quarter -- there's some excess inventory floating around in the PC manufacturers' pipelines, and Western Digital expects a correction in the fourth quarter. That hurt. Shares are down 3% as of this writing, bouncing off a 4.3% floor at worst.
I'd understand this pattern if Western Digital was some growth phenom with highly inflated share prices and valuation. That was never the case. Along with sector rival Seagate Technology (Nasdaq: STX ) , Western Digital has been a mouthwatering value play for a long time. The market expects SSD technology as presented by STEC (Nasdaq: STEC ) and SanDisk (Nasdaq: SNDK ) to make hard drives obsolete and unsellable, and it was a mature low-growth market with thin margins to begin with.
From where I sit, Western Digital's cautious market outlook is simply a responsible approach to take. I'd much rather invest in honest management teams than Pollyanna spin masters.
In addition, those hurtful outlook comments may have been a touch too conservative. Tablet computing should be digging impact craters into the hard-drive market because those laptop-replacement gadgets tend to ship with memory-based storage. But Wedbush Securities analyst Kaushik Roy dug into the improving gross margins at Western Digital and came up with a different conclusion: "Tablet cannibalization has not yet impacted them. The question is going forward what happens."
So Western Digital is an even deeper value today than it was yesterday. You can act on that knowledge as fellow Fool Jim Mueller did in his Rising Star portfolio a couple of weeks ago, or just add Western Digital to your Foolish watchlist to look out for further thinly motivated drops.