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Benjamin Graham taught that Intelligent Investors must do a thorough fundamental analysis of investment opportunities to determine their intrinsic value and inherent risk. This is best done by utilizing a systematic approach to analysis that will provide investors with a sense of how a specific company compares to another company. By using the ModernGraham method one can review a company's historical accomplishments and determine an intrinsic value that can be compared across industries. What follows is a specific look at how Western Digital Corp. (NASDAQ:WDC) fares in the ModernGraham valuation model.

WDC Chart

WDC data by YCharts

Defensive Investor - must pass at least 6 of the following 7 tests: Score = 5/7

  1. Adequate Size of Enterprise - market capitalization of at least $2 billion - PASS
  2. Sufficiently Strong Financial Condition - current ratio greater than 2 - FAIL
  3. Earnings Stability - positive earnings per share for at least 10 straight years - PASS
  4. Dividend Record - has paid a dividend for at least 10 straight years - FAIL
  5. Earnings Growth - earnings per share has increased by at least 1/3 over the last 10 years using 3-year averages at beginning and end of period - PASS
  6. Moderate PEmg ratio - PEmg is less than 20 - PASS
  7. Moderate Price to Assets - PB ratio is less than 2.5 or PB x PEmg is less than 50 - PASS

Enterprising Investor - must pass at least 4 of the following 5 tests or be suitable for a defensive investor: Score = 5/5

  1. Sufficiently Strong Financial Condition, Part 1 - current ratio greater than 1.5 - PASS
  2. Sufficiently Strong Financial Condition, Part 2 - Debt to Net Current Assets ratio less than 1.1 - PASS
  3. Earnings Stability - positive earnings per share for at least 5 years - PASS
  4. Dividend Record - currently pays a dividend - PASS
  5. Earnings growth - EPSmg greater than 5 years ago - PASS

Valuation Summary

Key Data:

Recent Price$89.33
MG Value$144.04
MG OpinionUndervalued
Value Based on 3% Growth$84.02
Value Based on 0% Growth$49.25
Market Implied Growth Rate3.46%
Net Current Asset Value (NCAV)$6.69
PEmg15.42
Current Ratio1.79
PB Ratio2.47

Balance Sheet - 12/31/2013

Current Assets$8,288,000,000
Current Liabilities$4,620,000,000
Total Debt$1,610,000,000
Total Assets$15,282,000,000
Intangible Assets$3,162,000,000
Total Liabilities$6,703,000,000
Outstanding Shares237,000,000

Earnings Per Share

2014 (estimate)$7.83
2013$3.98
2012$6.58
2011$3.09
2010$5.93
2009$2.08
2008$3.84
2007$2.50
2006$1.76
2005$0.91
2004$0.70

Earnings Per Share - ModernGraham

2014 (estimate)$5.79
2013$4.63
2012$4.74
2011$3.71
2010$3.75
2009$2.51

Dividend History

WDC Dividend Chart

WDC Dividend data by YCharts

Conclusion:

Western Digital Corp. is a very intriguing company for Enterprising Investors, as it passes all five of the investor type's requirements. It does not qualify for Defensive Investors due to its low current ratio and lack of a ten-year dividend history. As a result, Enterprising Investors following the ModernGraham approach based on Benjamin Graham's methods should feel comfortable proceeding with further research into the company. As for a valuation, the company appears to be significantly undervalued despite the recent rise in the market price. The company has grown its EPSmg (normalized earnings) from $3.75 in 2010 to an estimated $5.79 for 2014, a level of demonstrated growth that surpasses the market's implied estimate of 3.46% earnings growth. This leads the ModernGraham valuation model to return an estimate of intrinsic value that is well above a margin of safety relative to the current price.

Disclaimer: The author did not hold a position in Western Digital Corp. or any of the other companies listed in this article at the time of publication and had no intention of changing that position within the next 72 hours.

Source: ModernGraham Quarterly Valuation Of Western Digital Corp.