Western Digital Shares Appear To Have 60% Upside Potential

| About: Western Digital (WDC)

Western Digital Corp (NYSE:WDC) shares have been in a solid uptrend for most of 2012. The stock started the year trading around $31 per share and then rose to about $44, but it has since slipped back to a more attractive level. This company makes disk drives and storage products which are widely used in desktops, laptops and other technology products. This sector has typically appeared undervalued relative to other stocks in the tech sector, but recently it seems that more investors are starting to appreciate the investment potential of companies like Western Digital and Seagate (NASDAQ:STX).

Here are a few reasons why, after a recent pullback, investors should consider buying Western Digital shares for the 60% upside potential:

  1. On April 27, 2012, analysts at Needham gave a strong buy rating for Western Digital shares and set a $61 price target. Investors who buy at current levels could see gains of about 60%, if the shares reach that target. Even at $61, the stock would still be selling for about 9 times earnings, which is well below the average multiple for the stock market.
  2. Western Digital recently reported earnings of $483 million, or $1.96 per share for the first quarter of 2012. This was a big increase from earnings of $146 million, or 62 cents per share, in the same period last year. While these results were good, the market seemed to get spooked by concerns that margins could be under pressure due to increased production going forward. Prices for storage devices had been strong for the past few months because of shortages caused by massive floods in Thailand. The industry no longer is facing shortages and that could cause prices to drop. However, the concerns appear overblown and other factors could keep prices from falling too much.
  3. This company has a strong balance sheet, with about $3.9 billion in cash and only around $231 million in debt. A solid cash-rich balance sheet reduces risks for investors and allows the company to consider acquisitions, stock buy backs and even possibly a dividend payment in the future.
  4. Western Digital could see a strong increase in demand for its products later this year for a few reasons. Computers often see a rise in sales for both the back-to-school season in the Fall, and also for the holidays. Also, Microsoft (NASDAQ:MSFT) is expected to release Windows 8 in the next couple of months. This could spark an upgrade cycle across the tech sector as corporations and consumers replace older computers when this new operating system is released.

Western Digital shares appear to be offer real value to investors and the downside risk looks limited at current levels. Buying into the stock now could reward investors who are willing to buy and hold for a rebound.

Key data points for Western Digital from Yahoo Finance:

  • Current Share Price: $37.89
  • 52-Week Range: $22.64 to $44.44
  • Dividend: none
  • 2012 Earnings Estimate: $6.98 per share
  • 2013 Earnings Estimate: $8.93 per share
  • P/E Ratio: about 5.5 times earnings

Seagate Technology (STX) makes storage devices, and the shares also appear undervalued. The company recently beat earnings estimates when it reported profits of $2.64 per share (excluding some charges) versus analyst estimates of about $2.10 per share. However, Western Digital shares have seen a sharper drop recently, so it might make sense to focus on that stock for rebound potential.

Key data points for Seagate from Yahoo Finance:

  • Current Share Price: $29.58
  • 52-Week Range: $9.05 to $31.49
  • Dividend: $1 per share which yields 3.2%
  • 2012 Earnings Estimate: $7.12 per share
  • 2013 Earnings Estimate: $9.49 per share
  • P/E Ratio: about 5.5 times earnings

Data is sourced from Yahoo Finance. No guarantees or representations are made. Please consult a financial advisor before making investments.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

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