Western Digital Corp.


Here we see a 2-year weekly chart of disk drive maker Western Digital Corp. (WDC).  After more than doubling from its 2004 low, the stock is less than 5% below it’s 52-week high and forming the right side of a 6-month base. Besides the current base and prior uptrend, here are two reasons why WDC might be worth a look.


One, hot new products.  I just bought my second Western Digital Passport 80 gigabyte (GB) external hard drive and I can tell you that these drives qualify as hot products.  They are small, sturdy and require no external power supply because they’re powered through the USB cable.  Best of all they can be found for around $1.50 per GB (i.e., $120 for 80 gigabytes).  They also come in 40- and 60-GB models, and probably soon 100+ GB models.

Two, strong and accelerating fundamentals, expanding profit margins, and a reasonable valuation.  For example, how does the most recent quarter strike you?  Revenue up 23% and EPS up 121% with the following valuation metrics: Enterprise Value (EV) to Revenue = 0.7, EV to EBITDA = 6.8, and forward P/E = 11.5.  Did I mention the $500 million in net cash on its balance sheet?  And that WDC has been beating rising earnings estimates by rising amounts in recent quarters?

Three, a pretty highly rated mutual fund, Allianz CCM Mid Cap Institutional Fund (PMGIX), purchased 1.01 million shares of WDC during it’s most recent reporting period.  That was the funds largest purchase and WDC went from not being in the portfolio to being the No. 2 holding.  You don’t see that too often!

So what’s wrong with WDC?  The disk drive industry is extremely competitive and at least parts of it are commodity sub-industries.  The disk drive industry can also be cyclical and its high fixed costs and significant capital spending requirements can add to the pain during a downturn.  So what’s the bottom line?  Not certain, but for now WDC goes on the watch list and we see what happens with the base and with next quarter’s earnings report.  Cheers!