Is It the Right Time to Buy Western Digital (WDC) Stock?
Shares of Western Digital (WDC) hit a new 52-week high of $108.67 on Dec 9, eventually closing at $107.80. The closing share price represents a strong one-year return of 35.9% and a year-to-date return of 28.5%.
On an average, Western Digital’s earnings have surpassed the Zacks Consensus Estimate by 4.4% over the last four quarters, making investors bullish on the stock. Moreover, the company has long-term earnings growth expectation of 9.5%.
Western Digital is the largest HDD manufacturer in the U.S. It is worth noting that IT research firm Gartner expects worldwide HDD shipments to grow at a compound annual growth rate (CAGR) of 2.9% from 2013 (552 units) through 2018 (635 units).
Gartner also stated that high-capacity business drives are expected to grow at a CAGR of 25.1% during the period. Western Digital’s new high-capacity helium drives target this growth opportunity.
We believe the secular growth of digital data and Western Digital’s growing exposure to the small and medium business space are long-term positives. We remain encouraged by the company’s launch of a string of storage devices under the mobile and cloud segment.
The price appreciation can also be attributed to the recent resolution of a couple of Western Digital’s non-compliance problems with the Ministry of Commerce of the People’s Republic of China (:MOFCOM) for the integration of Hitachi GST unit, which currently operates as a separate entity. Successful integration would help Western Digital to streamline its Chinese operations, such as manufacturing capacity rationalizations, which would positively impact gross margins and result in cost synergies.
Notably, the company has also gained momentum from its strong fundamentals and better-than-expected first quarter fiscal 2015 results released on Oct 28, 2014. Since the release, the stock price has moved up 15.8%.
Western Digital’s top-line increased 3.7% year over year and also surpassed the Zacks Consensus Estimate, primarily due to strength in hard disk drive (:HDD) businesses and Flash Platforms solutions businesses. Also, seasonally higher demand for client and branded products, coupled with constant demand from the enterprise segment, supported the year-over-year revenue growth. Non-GAAP earnings during the quarter came in at $2.10 per share, which surpassed the Zacks Consensus Estimate of $2.04.
The company also provided positive second-quarter guidance. For the second quarter of fiscal 2015, Western Digital expects non-GAAP earnings per share (excluding stock based compensation expenses) to be in the range of $2.00 to $2.10 per share. The Zacks Consensus Estimate is pegged at $2.09 cents per share. Revenues are expected in the range of $3.75 to $3.85 billion. The Zacks Consensus Estimate is pegged at $3.82 billion.
Moreover, the company is expected to get good mileage from its cloud-based business. Cloud-based storage has become the order of the day as it allows users to access content through different gadgets such as smartphones, tablets and personal computers.
Nonetheless, weaker-than-expected PC shipments will likely affect Western Digital’s results. According to IDC’s latest report, shipments are expected to decline 2.7% in 2014, lower than the 9.8% decline in the previous year, primarily due to higher-than-expected sales in Western Europe and Japan. Although the rate of decline is expected to stabilize from 9.8% registered in 2013, the return to growth remains a distant possibility.
However, Western Digital’s strategic acquisitions to widen its SSD offerings are expected to position it better with respect to peers such as Seagate (STX) and SanDisk Corp. (SNDK).
Currently, Western Digital has a Zacks Rank #3 (Hold). Investors may consider a better-ranked stock like Micron Technology (MU) sporting a Zacks Rank #1 (Strong Buy).
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