Is Western Digital a Value Play?

| About: Western Digital (WDC)
The weeks following Western Digital's (NYSE: WDC) earnings announcement on 7/21/10 have seen the stock plummet close to 20%. I guess that's the thanks Western Digital gets for growing net income 194% since last year. The company also reported year over year revenue growth of 32% and EPS growth of 34%. Oh, and by the way, the company ended the most recent quarter with $2.7 billion in cash.
Here are some fundamentals from the last 5 years for Western Digital:
Fiscal Year Ending
Net Income
Trailing P/E
BV Per Share
P/B Ratio
Is there something wrong with Western Digital? If not, is there something wrong with the market's valuation of Western Digital? After all, this is a company that, in the last 5 years, had an annual compounded revenue growth rate of 22% but an average P/E of 7.8 and an average P/B ratio of 2.4. No matter what Western Digital's year over year growth rate has been, it appears their P/E is stuck in a "solid state" (The average P/E for the S&P 500 is 19.8).
So far I've left out the fact that Western Digital's CFO, Timothy Leyden, forecasted a weak Q 1 EPS estimate of $0.80 to $0.90, but would it have mattered if Western Digital beat the forecast? After all, this is a stock that even in the best of times is held in the basement of P/E multiples.
Even considering a weak quarter, I find it hard to overlook the value of Western Digital. If valuations revert back to an average P/E of 7.8, the stock would be $46; if using the average P/B ratio, the stock would be $48. But both of those numbers seem almost laughable considering the sentiment in the stock and the hard drive industry as a whole. After all, Western Digital's rival, Seagate (NYSE: STX), is valued similarly to Western Digital.
So, is Western Digital a value play? When I see a company in as strong a financial position as Western Digital trading at a current P/E of 4.1, with a 5 year average return on Equity of 32%, Price/Sales ratio of 0.57, and a Price/Book Value of 1.19, I have to say yes. Not only that, I'm putting my money where my words are and am buying Western Digital. And I'm not the only one. Western Digital's most recent 10-K states that the company has been in the process of buying its own shares since 7/2/10:

Subsequent to July 2, 2010 through August 13, 2010, we repurchased 1.8 million shares for a total cost of $50 million.

Western Digital's Board of Directors had previously authorized a share repurchase program of $750 million through 3/31/2013. Including the recent activity, the company has repurchased $334 million worth of stock which still leaves a potential $416 million available to repurchase shares through 3/31/2013. At current price levels, this would equate to roughly 17 million shares.
For investors who want to jump in with me there are alternatives to owning Western Digital Stock. One alternative is to looking into options; One strategy that I like is buying the Jan 2011 $20 Call. This option will cost you around $5.85, or $585 for one contract which equates to 100 shares of Western Digital stock. In comparison, if you buy 100 shares of Western Digital you'll tie up around $2,446. With a Delta of 0.78 the option is going to move just about in step with the stock and only trades at a 5% premium to buying the stock outright.

Disclosure: Long shares of WDC, Long WDC Jan 2011 $20 Call Option