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Why Western Digital Rose Another 12.7% in December

By Billy Duberstein – Jan 6, 2022 at 7:07AM

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Western Digital received a debt-rating upgrade and benefited from a lockdown in China that could limit NAND supply from rivals.

What happened

Shares of Western Digital (WDC 0.53%) rose 12.7% in December, according to data from S&P Global Market Intelligence. The December rise followed closely on the heels of a 10.6% gain in November, capping a strong run for the hard-disk and NAND-flash producer, compared with other parts of the tech market.

Besides Western Digital being a cyclical value stock, which held up better than high-flying software names that were battered in November and December, Western Digital also had one company-specific and one sector-specific catalyst that helped send it higher last month.

Closeup of two memory chips held by a person comparing their sizes.

Image source: Getty Images.

So what

In early December, Western Digital received an investment-grade rating from Fitch -- the second major debt-ratings agency to do so. Western Digital has made progress on improving its balance sheet ever since it cut its dividend back in May of 2020, and that is paying off with this improved debt rating.

On the heels of Fitch's upgrade, management chose to sell $1 billion worth of new notes, half at an interest rate of 2.85% due in 2029 and the other half at a rate of 3.1% due in 2032. The new notes will go toward refinancing higher-priced debt.

Lower interest expenses are nice for any company, but rising NAND flash prices are even better in the case of Western Digital. On that front, the company got a break late in the month when the Chinese city of Xian locked down amid a COVID outbreak in the city. Western Digital competitor Samsung has NAND manufacturing facilities in Xian, and Samsung said it would be adjusting operations to comply with the new temporary COVID rules.

NAND flash modules are commodity-like in nature, so if some supply goes offline for a while, prices could shoot up. That would benefit all NAND producers, especially those like Western Digital that don't have operations in Xian.

Now what

The Xian lockdown happened at the end of December, and we don't know for sure if Samsung's production will be significantly affected. Still, the memory sector appears to be on an upswing amid strong end-customer demand for semiconductors and data-driven applications for enterprises.

Western Digital trades for only 8.7 times fiscal 2022 earnings estimates, with its fiscal year ending in June. Despite its recent run, Western Digital has lagged the broader tech sector for years. That makes it a strong bounce-back candidate in 2022 as investors rotate out of highly valued growth stocks and rotate into cheaper value and cyclical plays.

Billy Duberstein has no position in any of the stocks mentioned. His clients may own shares of the companies mentioned.  The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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