There are plenty of undervalued stocks on the market these days. Market makers backed away from risky investments and richly valued stocks over the last four months, and the downturn dragged down the stocks of many fantastic businesses.
On top of the broader market's downswing, data storage giant Western Digital (WDC -1.25%) recently had to halt production in two major manufacturing hubs for a couple of weeks.
The stock has now fallen 42% from last summer's multi-year highs, including a 35% drop from January's short-lived recovery. Western Digital's stock is found at the bottom of Wall Street's bargain bin, and it looks like a no-brainer buy right now.
By the numbers
First, let's have a look at Western Digital by the numbers.
- The stock is down 35% from January's recent highs, as mentioned above.
- At these prices, the stock trades at a measly 7 times trailing earnings, 4.7 times forward earnings estimates, and 12 times free cash flows. The stock is appropriately priced for a total disaster.
- In January's second-quarter report, Western Digital exceeded Wall Street's consensus revenue estimates by 14% while smashing analysts' bottom-line target by a 24% margin.
- The company's trailing earnings have more than tripled over the last two years. Western Digital recently became more profitable than arch rival Seagate Technology (STX 0.62%) for the first time since 2017:
WDC Normalized Income (TTM) data by YCharts
We're talking about a market leader with a significant advantage over its main rival; Western Digital collected $2.6 billion of second-quarter sales from its flash-based solid-state drive (SSD) products. Seagate's SSD sales stopped at $294 million in the same period. That's where the storage industry is going in the long run, and Western Digital has a huge head start.
Image source: Getty Images.
The manufacturing outage
A bad batch of raw materials for NAND flash memory chips caused an early February shutdown of chip-making operation in two of Western Digital's plants, jointly operated with Toshiba subsidiary Kioxia. By the end of the month, the manufacturing lines had been cleaned up, restocked, and returned to full production capacity.
In light of this outage, Western Digital lowered its third-quarter guidance for gross margins and adjusted earnings. At the midpoint of each guidance range, revenue projections were lowered from $4.55 billion to $4.30 billion while the bottom-line target dropped from $1.65 to $1.45 per diluted share. The output reduction should not carry over into the fourth quarter or any future periods, since the root cause has been stamped out. Additional steps have been added to the production process to ensure that this issue never rears its ugly head again.
The time to buy is now
So Western Digital's stock is down for the same reasons as everyone else's -- inflation fears, federal interest rates going up, the coronavirus specter, supply chain turbulence, and geopolitical conflicts -- plus a fleeting manufacturing challenge with limited impact on the company's short-term results. For that, the stock took a massive hit with one of the largest drops from 52-week highs among the constituents of the S&P 500.
This bountiful discount won't last long. When Western Digital reports its diminished third-quarter results and sets up more respectable guidance targets for the fourth quarter, investors will be reminded of the company's robust business model. That's why you should pick up some Western Digital shares on fire sale before everyone else has the same idea.
