Western Digital: Great Upside Potential With Limited Downside

| About: Western Digital (WDC)

While searching for value in the market, it is hard not to look at Western Digital (NYSE:WDC). There was a positive article in Barron's recently. I have been tracking the company for a few years now and it seems as though people have lost faith in the storage space and the company.

I think this is unjust because we are getting more and more information from the internet these days and there are increasing users of the internet. It only points to one thing - we need more storage space for movies, music and photos.

The world's data is only increasing and at a faster speed than many expected. This will lead to an increasing demand for the storage devices created by Western Digital and its peer Seagate Technologies (NASDAQ:STX).

Let's turn to valuations. WDC has about $10 of net cash on its balance sheet. Take that out, and you are effectively paying $28 for the company.

I estimate WDC will earn about $6.60 this year and $6.90 in 2011. Now given that it has handsomely beat expectations of mine and that of sell side analysts, there is upside potential to this number. However, I think downside is limited because the underlying demand is very strong and will continue to be so in the next months and years.

From a P/E stand point, the company has a P/E of 4.2 for 2010 earnings ex cash and 4.0 given 2011 earnings expectations. Now it could be even cheaper given that cash will grow through next year and international revenue might accelerate faster than expected.

The point I want to emphasize here is that this stock offers great upside potential with limited downside and WDC is not going to be bankrupt anytime soon. The catalyst will be its consistent strong earnings each quarter as people recognize the true value of WDC and bid it higher.

Price Target : $76 Jan 2012

Disclosure: Long WDC