Please ensure Javascript is enabled for purposes of website accessibility

Is Western Digital's Stock Destined for Greatness?

By Alex Planes - Apr 22, 2013 at 5:00PM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

Let's see what the numbers say about Western Digital.

Investors love stocks that consistently beat the Street without getting ahead of their fundamentals and risking a meltdown. The best stocks offer sustainable market-beating gains, with robust and improving financial metrics that support strong price growth. Does Western Digital (WDC 0.15%) fit the bill? Let's take a look at what its recent results tell us about its potential for future gains.

What we're looking for
The graphs you're about to see tell Western Digital's story, and we'll be grading the quality of that story in several ways:

  • Growth: Are profits, margins, and free cash flow all increasing?
  • Valuation: Is share price growing in line with earnings per share?
  • Opportunities: Is return on equity increasing while debt to equity declines?
  • Dividends: Are dividends consistently growing in a sustainable way?

What the numbers tell you
Now, let's take a look at Western Digital's key statistics:

WDC Total Return Price Chart

WDC Total Return Price data by YCharts.


3-Year* Change 


Revenue growth > 30%



Improving profit margin



Free cash flow growth > Net income growth

167.6% vs. 116.4%


Improving EPS



Stock growth (+ 15%) < EPS growth

16% vs. 100%


Source: YCharts. *Period begins at end of Q4 2009.

WDC Return on Equity Chart

WDC Return on Equity data by YCharts.


3-Year* Change


Improving return on equity



Declining debt to equity



Dividend growth > 25%

Initiated in 2012


Free cash flow payout ratio < 50%



Source: YCharts. *Period begins at end of Q4 2009. **Assumes four quarterly payouts equal to Q4 payout vs. trailing-12-month FCF.

How we got here and where we're going
Six out of nine passing grades is a pretty solid showing for one of the two big hard-drive makers left standing after the wave of industry consolidation that took place several years ago. However, it's not quite as good as what chief competitor Seagate Technology (STX) managed last year on the same analysis, when it pulled off a very rare perfect score. Does that mean Seagate is indisputably better than Western Digital, or can Western Digital overcome a few minor weaknesses to regain ground? It shouldn't be too hard to pay down debt and resume profit growth now that major supply chain problems are a thing of the past.

Here's one simple fact to consider: Western Digital is definitely one of the cheapest stocks on the market right now. Seagate is even cheaper, but with both dawdling at a mid-single-digit P/E ratios, investors can easily imagine a sizable upside if only valuations return to long-term averages. But why are hard-drive makers so cheap? Well, it can be hard to justify optimism over a component primarily used by a dying industry. With PC sales showing their worst performance in decades, it's worth considering the possibility that real growth is over. After all, Intel (INTC -0.31%) relies on the same basic sectors as Western Digital -- PCs primarily, and server manufacturers as a backup -- and the company's earnings have not been particularly strong. Intel is the hardware sector's bellwether, and if it can't overcome PC weakness, the long-term prospects for hard-drive makers may be similarly dim.

Despite that weakness, Fool analyst Jim Mueller thought that Western Digital was in a better position than Seagate, and was worth buying in February. A server may only need one processor, but data use continues to explode, and each hard drive can only store so much. Every social-media status shared, photo uploaded, video played, and multiplayer game enjoyed online has to store its data somewhere. Western Digital got Jim's nod for a stronger financial picture than what he saw at Seagate, but both companies are liable to succeed if the cloud-storage trend outpaces the need for cloud servers themselves. Another driver of Western Digital's future outperformance might be helium-enhanced hard drives, which appear to boast better power consumption and higher capacity than existing drives.

Putting the pieces together
Today, Western Digital has some of the qualities that make up a great stock, but no stock is truly perfect. Digging deeper can help you uncover the answers you need to make a great buy -- or to stay away from a stock that's going nowhere.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

Western Digital Corporation Stock Quote
Western Digital Corporation
$58.54 (0.15%) $0.09
Intel Corporation Stock Quote
Intel Corporation
$43.47 (-0.31%) $0.14
Seagate Technology plc Stock Quote
Seagate Technology plc

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning service.

Stock Advisor Returns
S&P 500 Returns

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 05/16/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.