"No, there's no making sense of it
Every way I go I'm bound to lose
Too much love will kill you
Just as sure as none at all"
-- "Too Much Love Will Kill You" by Brian May, 1992
This tribute to the rapidly waning National Poetry Month seems like a perfect fit for Western Digital
The maker of hard drives for enterprise and consumer systems just reported third-quarter results, and it was a blowout. Non-GAAP earnings jumped 281% year over year to $2.52 per share on $3.0 billion in sales -- a 30% boost. Analysts would have settled for something like $1.55 per share on the bottom line and a 7% revenue boost.
Moreover, Western Digital is so over the flooding disaster in Thailand. "The recovery activities related to both WD operations and those of our supply chain partners affected by the Thailand floods have reached a point where we now have the capability to adequately meet anticipated customer demand in the current quarter and beyond," said CEO John Coyne.
And therein lies the rub. WD's quick recovery is killing the stock, which dropped as much as 15% on the news. Not exactly the kind of reaction you'd expect from earnings like that, right? In all fairness, archnemesis Seagate Technology
So why is a full recovery so bad for hard-drive stocks? In very simplistic terms, the disaster hamstrung hard-drive production and drove up prices significantly. With supply and demand in balance once again, investors fear that drive prices might plummet -- taking revenue and profit boosts with them. Just look at this pricing trend and tell me what happens when average unit prices snap back to normal levels:
|Average Selling Price||$47||$45||$44||$46||$69||$68|
|Unit Volume (Millions)||52.2||49.8||53.8||57.8||28.5||44.2|
Data taken from Western Digital's earnings calls as presented by S&P Capital IQ.
Put your Foolish thinking cap on
How should we Fools think about Western Digital's update? For one thing, these comments run counter to Seagate's more muted recovery outlook. In Seagate's view, it will take another year or so to repair the capacity gap across the computing industry's food chains. System builders, distributors, and other customers still need to rebuild their depleted inventories even after manufacturing plants get back to full speed.
And I think Western Digital agrees with that thinking. The outlook for the second quarter points to sales in the $4.3 billion range and earnings close to $2.45 per share. The year-ago quarter -- pre-flooding -- stopped at $2.4 billion and $0.81 per share, respectively. That surge comes even as the expected unit volume fell somewhat year over year.
Coyne underscores that conclusion: "There's still a little bit of catch up to do." My math also agrees as the stable revenue and earnings guidance figures imply that pricing should stay pretty flat at last through the summer. If you picture unit prices plunging while volumes ramp up, you might still see similar top-line sales, but profits would suffer.
It's like the difference between Apple
If Apple's margins ever start looking like the retailing giant's, profits would plunge. That's what investors imagine happening to Western Digital and Seagate very soon. But even a fully functional supply chain will need to run red-hot to plug the lingering unfilled demand -- and don't forget the holiday and back-to-school seasons boosting demand in the back half of the calendar year. I still see strong pricing lasting at least until the holidays, maybe even into 2013.
But wait -- there's still more! Some technology trends work in favor of the big and cheap magnetic disk drives that are Western Digital's bread and butter. In a special report penned by the Fool's finest analysts, you'll find the only stock you need to profit from the new technology revolution in Big Data and business intelligence. The report is totally free, but it won't be available much longer, so get your copy right away.
Fool contributor Anders Bylund holds no position in any of the companies mentioned. Check out Anders' holdings and bio, or follow him on Twitter and Google+. The Motley Fool owns shares of Western Digital and Apple. Motley Fool newsletter services have recommended buying shares of Apple, creating a diagonal call position in Wal-Mart and creating a bull call spread position in Apple. The Motley Fool has a disclosure policy.
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