The pro forma estimates I have seen for WDC/SNDK range from $9.60 to over $10. Due to SNDK's higher margins and the growth offered by SSDs, investors should lift the multiples somewhat for WDC. My estimate is for a P/E in the range of 12.5 to 13.5, so your $130 target appears on track.
It's been over 20 years since I began participating on these boards. At that time the dot.com crash was front and center, with Analysts like Henry Blodget pumping dot.com names to the public while panning them to his clients. Blodget reached fame as Merrill Lynch's Internet analyst, helping champion companies like Webvan Group Inc. and eToys Inc. He was later fined and banned from the securities industry for publicly telling investors to buy stocks while privately criticizing them.
Yet, Blodget is cofounder, CEO, and editor-in-chief of Business Insider, one of the most-read business and tech news sites in the world and a regular on CNBC.
Remember junk bond king Mike Milken, who went to jail? Well, his net worth of $2.4 Billion includes a $15 million home on Lake Tahoe.
We all remember Hedge fund hero Jim Chanos' call in 2013 to short the drive stocks, after which they doubled, LOL. Chanos still featured on CNBC and at investment conferences, yet no mention of the three drive stock analysts who told us to buy!
Sadly, little has changed since then.
I was reviewing a list of worst performing stocks which featured a stock that had dropped 98% over the past 18 months to $0.19. When I looked at the Analysts' ratings of the stock, 8 were still at buy and only 1 had downgraded to hold. Turns out the company had paid $1 M in "advisement fees" to a number of the firms covering the stock.
In late June, an optoelectronics stock fell $5 the day BEFORE a questionable research note came out.
Same story in the disk drive stocks. About a week before B of A initiated STX at underperform on 3/2/15, a large number of short term put options were purchased. STX then fell 10% after the rating was published . One month later B of A moved STX up to hold.
STX down 50% this year and 35% since early September, yet 8 Analysts have remained at buy vs 4 at sell. Most of these firms at buy have either received substantial banking fees or other perks from Seagate.
The Sleaze goes on!
Yes both STX and WDC are cheap, but there are valid reasons for these low valuations. In WDC's case the primary concern centers around the SNDK acquisition.
There are also concerns about STX's four acquisitions plus:
1. STX' steeper (2.5X) decline in earnings over WDC's earnings since FY13 after adjustment for share repurchases..
2. STX missed last two quarters
3. STX' margins not expected to come back to their normal historical range until mid-CY16
4. WDC's acquisition of SNDK gives it an internal supply of NAND flash and will make WDC #2 in SSDs.
5. Superior execution record of WDC relative to STX over the years.
Disagree on your rationale:
Based on consensus FY16 Analyst Estimates, STX trading at a P/E of 11 versus 10 for WDC.
"Better suited to benefit from a potential glut in supply in flash. WD will own it with the purchase of SNDK but STX presumably can take advantage of lower costs"
Remember industry is transitioning in 2016 to 3D NAND flash, so glut of supply for these chips is not probable. NAND FLASH comprises 80% of the bill-of-materials for an SSD and flash margins are 45%, which gives WDC a major leg up on STX. A better point would be the concern over the ramp of 3D flash at SNDK.
"Less distractions versus WD"
STX has made four acquisitions and a number of people believe these acquisitions are posing a challenge for STX. Some evidence to support this are the recent management changes; new CFO and head of cloud storage division at STX.
Just a friendly reminder, all the new IDs posting on this board are SFB Hedge fund traders and Arbs who are short and don't have a clue. So let's make it easy for them and the cajoless mutual fund PMs.
1. Data storage demand is expected to grow at a 20% CAGR over next three years.
2. Data will be stored on either hard drives or SSDs
3, WDC is #1 in hard drives and will be #2 in SSDs after SNDK acquisition.
4. Since NAND flash represents 80% of the BOM of an SSD, an internal supply of flash gives WDC a major advantage over STX, which is having other problems, in the SSD space.
IMHO, WDC erred in announcing the sensation of the share buyback, it gave the shorts more courage. Should have said nothing and continued share buyback at a significantly slower rate.
A caller just asked Cramer about WDC, which provoked a commodity laced rave about WDC going from $60 to $10.
Twice over the past six weeks YHOO has carried Cramer quotes touting Seagate.
The guy now goes back to my clown list.
Besides the NYC/CT short cartel the option trolls also manipulate the drive stocks. Buying $60 put options while selling out-of-the money calls is a cash machine.
Possible arbitrage strategy with SNDK may also be pressuring the stock down.
With STX busting the bank to buy $1 B in shares last quarter and WDC announcing termination of its share repurchase agreement, it has opened the door to the forces of darkness.
Since the Big Bang was a rerun last night, I tuned into Donald and the 7 dwarfs last night for entertainment.
My problem with the Republicans is their hands off business mantra. Didn't W ignore the the CDO and the hedge fund scams under that pretext?
Don't look for any relief if Hillary gets in. Hubbie, Bubba, was owned lock, stock, and key by the big banks and Wall Street.
You see the big boyz and girlz play both sides of the street to cover their rear ends.
Funniest line in the debates was Huckabee' s "I beat the Clintons and I lived to Tell about it", i.e. the Whitewater body count. How quickly we forget!
If you want to clean up the Street and stop the nonsense, here are some thoughts:
1. Wall Street crooks need to go to jail and have their wealth disgorged. I was recently up at Lake Tahoe and was shown Mike Milkens $15 M lake front home. You remember Mikie the junk bond king, don't you? He did go to jail for a while, but once again proved that Wall Street crime does pay
2. 5% tax on mergers and acquisitions, which destroy jobs. The grease ball bankers and the I banks can afford it.
3. One cent tax per share on all computer trades.
Like Wall Street, the 0.001% has figured out how to game the political system. Here are some ideas to take back the country:
1. National primary. Does it bother you that New Hampshire and Iowa have a greater say in determining who runs for President than New York or California?
2. Term limits or require 20% of the seats in Congress be held for just six years.
3. The flush amendment. Have the nation vote whether the entire Congress should be removed every two years after a Presidential election. This gets us around the thinking that everyone else's Congressmen, but the one who represents me, is a moron#$%$.
We will learn more about it next week, but what is going on with margins?
STX's came in 300 bpts below expectations and WDC's were 90 bpts light?
WDC should have picked up the 8 GB business and the overall TAM was up, so why did margins drop the most in 4 years?
1. Nearline sales crashed?
2. Performance enterprise sales crashed?
3. Both Nearline and performance sales crashed?
4. ASPS fell a lot?
5. Both firms having problems with acquisitions?
SSDs will hit performance HDDs first.
Is 3D NAND flash or Xpoint coming on faster than the drive companies thought.
I sense urgency on the part of both firms.
INTC/MU Xpoint coming up in 2016, it's supposed to offer speed like DRAM and densities of flash, but most expect it to be pricey?
Stay tuned folks!
There is another complementary aspect to the acquisition that some may overlook.
Flash manufacturers spend a lot of money on capex, SNDK 25% of sales versus 6-7% sales for WDC. A new flash fab can cost $3-$4 billion. Just ONE, next gen EUV litho tool costs $100 M.
The drive firms generate a lot of free cash flow, $1.5-$2.2 B, which can be put towards the capex needs of the flash firms.
Three important benefits of the merger that have not received much comment are margin and multiple expansion and the PCIe market.
Combining Fusion I/O and Virident gives WDC a dominant position in the PCIe market.
SNDK has mid-40% margins versus WDC's margins in high 20% range, WDC's margins will also improve due to internal sourcing of flash. WDC slides indicate 400 basis points higher margins which is probably conservative.
SNDK shares have historically traded at P/E multiples of 15 to 20 which are above WDC's margins.
"Why would you bay almost 3 times sales"
1. SanDisk shares have been trading 15-20x earnings over the past year, investors should give combined firm higher, multiple.
2. An internal supply of NAND flash gives WDC a big advantage over STX
3. Fusion I/O + Virident give WDC strong position in PCIe market
Will STX look for a White Knight (MU)?
"I would be hard pressed to see how STX can continue as a separate entity"
Stay tuned folks, MU-MU-MU!
For years, I periodically cited the NYC/CT hedge fund cartel and their shill bank Analysts in my Hall of Shame. So it's only fair after the latest episode to induct some of the STX bulls and their friends on this board.
To the posters who went to great length to smear a couple Analysts who had the audacity to lower STX from buy to sell last month, you are in. For them it had to be some evil conspiracy with the shorts since no one should downgrade a stock after it misses earnings, guides to lower sales for next year, has a layoff, makes major management changes in a key unit, has insider selling, and makes a pricey, questionable acquisition.
To the financial press, you are in. Not just Barrons with its constant paid for pumping of analysts who have been telling us to buy, buy, buy as STX' shares crashed 40% since 12/24/14, but over the past month; Cramer, The Street, USA Today, have all been pumping STX.
To Needham and the other forever bullish I bank Analysts, aka the olive oil brigade, whose firms have collected millions in fees from Seagate for share buybacks and other banking activities, you deserve a special place of honor in my Hall of Shame.
For the second tier STX cheerleading firms like Bream, RBC, Maxim, and Pacific Crest, I thought I might give you a pass since your mutual fund clients are not paying you for your insights, if you have any, but rather to provide access to STX management. However, after thoughtful consideration you could have turned from the dark side, but you didn't. So you are in.
Congrats to all!
I agree. all good points, but it appears to me than WDC is further down the road on SSD, i guess the UNIS investment supports that, and STX is having problems in the cloud space and with new acquisitions, which probably accounts for STX' greater decline in EPS over the past 2 or 3 years.
While some continue to constantly whine or cite short conspiracy theories, I certainly can't blame an Analyst for sticking his neck out and raising a warning flag about STX this month, especially with STX being down 16% in September versus a flat NASDAQ.
If you are blaming an Analyst for being late or myopic in his concern about how the share repurchases have masked a significant decline in earnings, then shouldn't you blame the 27 other Analysts for being completely blind or cajoless for failing to raise this and other issues??? BTW, there are several OTHER reasons to worry about STX.
I don't blame Luczo for using the share repurchases to help prop up the stock price.
I do blame Luczo for playing games with the Analysts and pitting one against another.
As noted in a post made three weeks ago, I also can't blame the Analysts for not being objective.
I do blame a number of the mutual funds.
Over the past 20 years, the objectivity of Wall Street research has gone into the crapper. A growing number of mutual funds have prioritized their payments to sell side research shops based upon how many management teams they can bring into the mutual fund offices. With over half the Sell side Boutiques disappearing over the past three years, no wonder you don't see many sells any more. Do you think a management team will travel with a sell side shop that has a sell on its stock? So its a matter of survival for a sell side shop to kiss up to management so that they will visit their clients, attend their investor conferences, or provide access to management.
"Who is more deceitful in this circus? "
With STX being down 16% this month versus the NASDAQ being flat, I think the market has answered your question.
You are conveniently forgetting several things:
1. Over the past 6 months, four firms, not just Benchmark have put STX to sell or underperform. Two others since late July.
So absolutely nothing has happened since late April to justify a more negative position?
1 STX missed its June forecast, margins were down 220 bpts sequentially, while WDC came in as expected with flat margins 260 bpts higher than STX.
2. STX's total drive shipments sequentially fell 10% in the June quarter, enterprise drive shipments also fell 10%.
3. At its investor day on September 3rd STX guided to lower FY16 sales and very modest long term sales/unit growth from a prior forecast of flat Y/Y FY16 sales.
4. On 9/11/15, STX let go 7% to 8% of its US work force. If issues were apparent last spring, why did they wait so long?
5. The market went south in August primarily driven by concerns over slowing growth in China, a key market for STX. If things were so bad in China last spring, why didn't the market go down then?
6. In its July downgrade, Morgan Stanley raised issues about XRTX being a drag on earnings. Little, if any mention, by STX at its investor meeting or CITI conference about its acquisitions. The only significant thing I can recall is STX stated its PCIe sales were doing well. Several reports of management shake ups in its systems business.
"Or has his analysis always been so myopic?"
Myopic is better than being completely blind like the other 27 Analysts who have failed to note how the share repurchase has masked a significant decline in STX GAAP earnings.
WDC has the following pluses:
1. After adjustments for share buybacks and litigation charges, the decline in WDC's GAAP EPS for FY13-FY15 is far less than STX's decline
2 Easement of MOFCOM restrictions is seen adding $1.50 to $1.75 to WDC's EPS, STX will also benefit, but to a lesser degree.
3. WDC ahead on SAS enterprise SSDs and helium filled drives.
4. Last quarter STX missed and margins were down, WDC came in at low end of guidance with flat margins.
6. WDC has $2.7 B in net cash, STX has $1.7 B in net debt and $700 M now due for Dot Hill and a $800 M debt payment due in 2018.
6. Historically, WDC has more been consistent on its earnings forecasts.
7. It appears STX is focused on entering storage systems space which could be a tricky move with its customers.
8. STX's free cash flows have been in a steady decline, down 27% over past three years.
9. Morgan Stanley and others had voiced a concern about how STX is integrating its recent acquisitions.