Yes, you own a Western Digital product. For sure! The company generated $20.6 billion in sales of hard drives and solid-state drives (SSDs), as well as NAND based products. So essentially their storage products go into notebooks, desktops, mobile phones and data centers.
There is fear in the market that prices are coming down and that demand for hard drives will weaken. There is definitely competition and for sure this business is not without risks but it appears to be overdone. When I look around I see demand for storage increasing, not decreasing. Just think about all those high definition videos and photos you’ve been taking. You need to not only store them but also have a backup. Now you may say that you have moved everything to the cloud but where do you think that is? There is a storage center somewhere holding your data. And that storage center is backed up elsewhere. And guess what? We are saving more and more and more data.
There will be an explosion of data not only coming from our personal entertainment but from everywhere. How about surveillance. Big brother is watching you! And how about those autonomous automobiles? Smart houses? I’m sure I missing a zillion other applications but you guys are bright. You can see where this is going…
So good old Western Digital that bought SanDisk, by the way, is trading at 4.1x EBITDA. It’s cheap any way you look at it. They generated $3.4 billion in free cash flow versus a $23.5 billion enterprise value! Sure, guidance for next quarter EPS came in below expectations at $3-3.1 (vs $3.6) but just think that if that was the only earnings they had all year then its P/E would be 19x. Of course, the market is forward-looking but I think Mr. Market may have got this wrong. Usually, stocks with these valuations have over bearish analysts but even analysts think this is ridiculous with a price target of $96. I picked up some shares in the high 50s.
The dividend yield of 3.4% is a nice kicker and the recently announced buyback of $5 billion is a monster amount as the current market cap is only $17 billion! The company is trading at under 7x EV/FCF so if it trades at 10x which would still give it a 10% FCF yield then the equity will be worth 60%. FYI, computer and printer maker HP (HPQ) is currently trading at over 10x… I like my odds!
