On Thursday night, we'll get a first-quarter 2008 report from hard drive designer Western Digital
What Fools say:
Here's how Western Digital's CAPS score rates against some of its peers and competitors:
|
Market Cap (millions) |
Trailing P/E Ratio |
CAPS Rating (out of 5) |
|
|---|---|---|---|
|
EMC |
$52,830.0 |
35.4 |
***** |
|
Hitachi |
$22,080.0 |
N/A |
** |
|
Seagate Technology |
$14,620.0 |
12.6 |
**** |
|
Western Digital |
$5,520.0 |
10.1 |
**** |
|
Quantum |
$731.6 |
N/A |
*** |
If you can run a profitable storage business, it seems that CAPS players will like you, and Western Digital certainly qualifies on that point.
One All-Star player points to an "undeserved low price here," saying that the company "will outperform by reversing to fair price." Another bullish CAPSer says it is an "awesome company" with a promising product-development pipeline. Nobody has made a negative comment since March, and there is just one thumbs-down grade among the last 165 ratings entered.
What management says:
WD upped its earnings and revenue guidance in September, and now expects $0.61 to $0.65 of net profit per share on $1.6 billion to $1.65 billion in sales. The brighter outlook was based on "improvements in demand, product mix and pricing."
What management does:
There's steady and ample sales growth going on, and the profit margins have an agreeable habit of stepping up a bit every now and then. That leads to generous earnings growth.
If you assume that Western Digital can keep up at least 20% earnings growth for the foreseeable future and add in a P/E ratio around 10 times trailing earnings, then you get a PEG number in the Dirt Cheap range. Yes, that's a technical term.
|
3/2006 |
6/2006 |
9/2006 |
12/2006 |
3/2007 |
6/2007 |
|
|---|---|---|---|---|---|---|
|
Gross |
18.7% |
19.1% |
18.9% |
18.2% |
17.3% |
16.5% |
|
Operating |
7.8% |
8.5% |
8.6% |
8.3% |
8.3% |
7.6% |
|
Net |
7.5% |
9.1% |
9.3% |
9.2% |
9.1% |
10.3% |
|
FCF/Revenue |
2.4% |
2.3% |
3.6% |
3.6% |
4.9% |
5.4% |
|
Growth (YOY) |
3/2006 |
6/2006 |
9/2006 |
12/2006 |
3/2007 |
6/2007 |
|---|---|---|---|---|---|---|
|
Revenue |
21.7% |
19.3% |
20.1% |
23.0% |
23.6% |
26.0% |
|
Earnings |
68.0% |
101.5% |
82.7% |
60.2% |
50.3% |
42.8% |
One Fool says:
It's hard to find fault with results like these, especially at such a low valuation. Running the numbers through a discounted cash flow calculator (available to Inside Value members -- take it for a free 30-day test drive) with a conservative 20% growth target shows that the stock may be 40% undervalued today. Simple P/E figures point in the same direction.
It's no wonder my fellow Fools like to highlight Western Digital in deep-discount roundups, or recommend that you give this stock to Mom on Mother's Day. I thought it looked cheap back in January, and the stock has nearly tripled the returns of the S&P 500 benchmark since then -- but it still has plenty of room to improve. Is this the report that will restore Western Digital to its rightful valuation? Shareholders certainly hope so; the rest of us want some more time to buy in.
