WDC's NAND manufacturing partner says it expects to post a bigger first-half profit than previously forecast as memory chip prices have climbed on rising demand for smartphones. Toshiba said it has also been seeing strong demand for hard disk drives for personal computers and game consoles.
Just another confirmation of recent trends.
How's it looking on your sides ... BOA/ML & GS?
It will be accounted for in a different way. But there will be a one-time $37Mill charge booked this qtr. It will hit GAAP EPS, but will be backed out in non-GAAP EPS.
I think that was one of the holdups on that buyout. TDK seems to have ownership in all the suspension manufacturers. On July 26th, the office of TDK and NHK Spring were raided by the Japanese Fair Trade Commission for price collusion in the HDD suspension market which is Hutchinson Technology's primary business. Somehow, the FTC decided to let the merger go through.
And the HDD manufacturers did not voice any objections. Either WDC or STX could have bought HTCH with little trouble.
Well, WDC did just provide another update. Again, on the debit side of the balance sheet.
They repriced the Euro Term loan. While it generates $23Mill/yr in savings (starting today), it also cost $37Mill in upfront fees to complete the refi. So it will take until the beginning of 2018 to see a positive return.
The buyout of HTCH by TDK finally passed the FTC. Not a big revenue deal, but HTCH was a significant supplier of suspensions to WDC & STX, and Toshiba (indirectly) to a lesser extent. Now, most will come through TDK (one way or another).
Wonder if Toshiba is going to stick it out?
"What do the IB's have against WDC?"
A few thoughts on this:
First and foremost, as v1kes & Luczo have pointed out many times, volatility is their manna. They must create MCV to make money. As somebody else pointed out, in the latest quarterly reports, Goldman has/had a substantial hedge in place on WDC. I suspect they do the same throughout much of the market, and have to create MCV in general. And I'm sure they have some close customers in bed with them.
Second, WDC has provided little additional insight or guidance regarding the synergies and benefits associated of the merger since the original announcement in Oct 2015. They have promised more information in Dec. So far, what we have gotten primarily relates to the cost side of the balance sheet. There needs to be more information on the other side of the ledger.
In the absence of more direct information from WDC, the IBs and analysts are left to their own particular brand of black magic.
Finally, this is a long term play. The real earning power will be constrained over the next 3 years by the debt. But once they get a big chunk of the debt paid down, then several $s in EPS will be added. A lot can happen over the next 3 years - both good and bad. And we all know ... uncertainty fuels MCV.
I would tend to think there is still a correlation between DRAM sales & PC demand, and that production will either lag or lead. I'm not an expert on the production side. But I feel pretty confident that DRAM sales (revenue) are still strongly tied to PC demand.
As such, HDD demand is also tied to PC demand. But the bonds are not quite as strong as they used to be. Still relevant, just less than what they were 5 yrs ago.
In that respect, there is a relationship between HDD demand & DRAM demand. And you can expect the same lever pullers on Wall Street to do their thing.
But their is an understated addition on the WDC side. That is NAND demand. And NAND demand has a much larger market breadth than HDD demand. I still don't think the analyst community knows how to value WDC. And WDC has not necessarily provided much clarity on that issue. There is still a lot of fumbling around and guess work with WDC. Which allows .... as they say... the mice to play while the cats are away.
Yes - from Intel. The PC ain't dead yet.
But I can guarantee the trading cartel (supported by the IBs) will not give up trying to hammer WDC back down. They took a stand against WDC and will not go quietly into the night, no matter how bad their call looks at this moment.
Well, after my post yesterday, I did find an update from BOA (must have come out within hours +/- my post).
They are still Underperform, but moved the price target UP to $38. They call for FY17 EPS of $3.84 (increased that by 15%), and $6.05 for FY18 (and over $8 for FY19). Note, most others are above $5. However, as a sign of continued "let's just pull this out of our a**," it's how they come to a target of $38 that's most questionable.
Rather than use the FY EPS they have above, they revert to CY17 and have an estimate of $4.78/shr. Then they use a PE = 8 to get $38. Why 8? Why not 10? Or 15? Most semis trade at much higher multiples and WDC is 1/3 semi. 8 is the same old HDD stuff. Nonetheless, look at the EPS trajectory they are predicting for WDC. Up 57% FY17 to FY18. And half of that trajectory is embedded in the CY17. I thought companies showing strong EPS growth were afforded higher multiples?
OK - let's stop this now. Because I'm trying to use rational, fundamental analysis (and comparisons) and clearly there is something else going on with their logic.
I can't .....
If we go back to when they first lower WDC on 5/13/16, it was entirely a short-term call based upon how they saw things going over the next year. What with the merger and the 3D NAND transition. Hence, they even acknowledged that and showed strong growth after a year. So what has happened in the last 4 months?
We are 1/3 through their one year view, and things are nowhere near as dire as they assumed. In their latest report: "We find the magnitude of the beat surprising even with expectations of a better pricing environment, and previously announced refinancing benefits. .... however, we acknowledge that the NAND pricing environment is presenting a near term tailwind. .... It also believes it is on track to make the transition to 3D NAND with 64-layer products and not all competitors are equally well positioned. "
They have been .... surprised. Yet, they stick to 8.
"I do wonder - who’s pulling the levers?"
I think there has been a concerted effort by the large IBs (BOA/ML & GS) to downgrade WDC for reasons not supported by market (product demand) fundamentals. When an analyst releases an "analysis" that has conclusions based primarily upon conjecture projected a year or more into the future (which means nobody can say if it's right or wrong) - while completely ignoring the present - tells me their motivation is not fact-based.
While there is certainly no way to say that present conditions will hold true in the future (just as there is no way to guarantee fears will either), the current actions of market competitors (discipline) and end-use demand will have an impact both currently and in the near future.
BOA is (currently) sticking to their thesis (underperform) with FY17 Rev of $16.95B, EPS of $3.33 and a $35 price target. Hey - they might still be right. Still a long way to go this fiscal year. However, the refi alone should cause them to bump up EPS. There has been ample evidence that end use markets are more robust than expected. And just about everybody else has revenue well above $17B, and EPS above $5.
Who writes these headlines????
IBD: "Western Digital Ups Targets, HD Supply Outlook Weak, Sprouts Warns"
That headline is about 3 different companies. But since we know WDC sells "HD," maybe we would think they are sprouting a warning!
Anyway, given all the recent news about the refi and the general HDD/NAND markets, you had to know EPS would come in higher than originally forecast.
It's more or less the diminished size of the PC market - in particular - the white-box PC market. White-box builders almost exclusively relied upon distributors. And there is also the rise of the pseudo-distributors: Amazon & Newegg.
Of the 3 evils (too much, too little, or price changes), they probably hate too much most of all. That's money tied up and not earning (not being turned over). Running low (or out) can be fixed by getting more, and price changes are usually protected or cushioned. But they may not be able to create demand if demand simply is not there.
Distribution has been kept lean (leaner than historically) for years (since the floods). For different reasons. Distribution as a % of sales has also been falling over the years. Last qtr was the lowest for WDC in 4 yrs. Therefore, its relevance has diminished.
I think it's more a case of computers being programmed to scan filings for keywords; then maybe, some nitwit wrote some headlines they thought were new. But the news was almost a year old. 10K are only filed yearly, so its been a while.
You may see some news feeds this AM talking about WDC initiating restructuring activities related to HGST. Apparently, these were triggered by the 10K filing. But this is not new news. This is old news from last calendar year.
DJ is making it sound like this is new. It's not.
Shortages in PC DRAM? And NAND? What HPQ said probably does have a more significant impact on MU than WDC. But if it's tight for one large customer, then it's probably tight for all.
What hasn't been talked about too much is the current state of the HDD market (still 2/3 of WDC). What with WDC & STX cutting production capacity and personnel .... yeah, things are noticeably tighter in HDD than about 3-4 months ago. Ingram practically ran out of external Passport drives. And there aren't a whole lot of regular DT drives.
Now, I think some of the tightness is distributors keeping low stock because nobody can predict what's going to happen next month, much less next quarter. Which is about how long it takes to complete the production cycle on a batch of high capacity enterprise/cloud space drives.
But all it takes is a small bump up in demand, and we are staring at backorders.
The Yahoo headline:
"A $12.5 trillion savings glut shows there's still fear in the markets: trader"
All the experts and talking heads keep ignoring (actually, dodging) the real reason people would rather hoard cash that pays nothing rather than risk it in the market:
Most people I talk to still do not trust that the market is fair to the average Joe. And they are right.
You have to be willing to accept that you are playing in a rigged game.
They made the announcement this AM. And they also reduced the interest rate on the remaining $3Bill. They est. total annual savings of $128Mill - that's about $0.44 per share!