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Why Western Digital Corp. Took a Fall Today

By Anders Bylund – Jul 29, 2016 at 1:16PM

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After a solid fourth-quarter report with mixed forward guidance, this market leader is on sale for 9.3 times trailing earnings.

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What: Shares of Western Digital (WDC 0.74%) fell as much as 11.9% on Friday, following the release of results for the fourth quarter of 2016. The report itself was impressive, but Western Digital's forward guidance failed to inspire investors.

So what: In the fourth quarter, Western Digital saw sales rising 9.5% year over year to $3.5 billion. Adjusted earnings fell from $1.51 per share to $0.94 per share. Analysts would have settled for earnings of $0.71 per share on sales near $3.45 billion.

Midway through the quarter, Western Digital closed the $19 billion acquisition of solid-state storage specialist SanDisk. As separate companies, Western Digital and SanDisk amassed total sales of $4.4 billion in the year-ago quarter. Then again, Western Digital's revenue fell 20% year over year in the third quarter. The puzzle pieces do fit together.

Looking ahead, management aimed for first-quarter revenue of roughly $4.45 billion and non-GAAP earnings near $0.88 per share. The sales target sits above the average analyst estimate, but Wall Street was expecting a juicier bottom line.

Now what: Western Digital headed into this report with plenty of momentum, as share prices had gained 31% after April's third-quarter report. Share prices took a dive in late June, reacting to the Brexit drama. The stock rebounded quickly, but I managed to start a Western Digital position while it was on fire sale.

That investment is still up by 10%, even after Friday's sharp plunge. Some analysts see this as profit-taking; I would call it another buy-in window. Western Digital has armed itself for the next era of storage technology, and the stock can be bought for a mere 9.3 times trailing earnings.

Anders Bylund owns shares of Western Digital. The Motley Fool also owns shares of Western Digital.

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$34.14 (0.74%) $0.25

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