Western Digital: Time to Step in and Buy, Says Hambrecht

Western Digital (WDC) shares have been under pressure lately amid the ongoing debate about the potential threat to the hard-drive business from NAND Flash-based storage, thanks to the rapid erosion of pricing in the NAND market.

There has been speculation that Apple (AAPL) and possibly other hardware makers could begin to use Flash rather than hard drives in some applications, including portable music players and some notebook computers. This is despite the fact that at current prices, NAND is still significantly more expensive for comparable storage sizes.

Matthew Kather, an analyst at W.R. Hambrecht, asserts that, whether or not Flash becomes a more serious competitor for small-size drives, the sell off in Western Digital shares is illogical. He notes that 75% of Western’s drives in the latest quarter were used in desktop computers; only 11% were sold for laptops, with most of the rest sold for use in digital video recorders.

Where is the exposure to NAND Flash here… the answer to this question is, there is minimal if any exposure to WD’s current business, yet the forward P/E multiple on the stock is touching a historic four-year low at 8x CY ‘07 estimates.

Kather has some advice:

Value investors, we believe this is the time to step in and buy the stock… this multiple compression is completely unwarranted in our view given the facts of where WD sells its drives, regardless of the different opinion on the [total addressable market] of microdrives or solid-state drive penetration.

Western yesterday was up 28 cents at $17.98.

WDC 1-yr chart