Western Digital Offers 50% Upside

| About: Western Digital (WDC)

I recently wrote about how Seagate Technology (NASDAQ:STX) is a great buy in the hard drive sector of tech. Seagate has only one major competitor: Western Digital (NYSE:WDC). Like Seagate, Western Digital is an attractive buy at current prices.

Source: FreeStockCharts.com

Company Growth Prospects: ★★★★

Western Digital is experiencing strong growth. Year over year EPS growth on a TTM basis is 19.72% and EPS growth on a same quarter year-on-year basis is 216.13%. Strong industry growth in emerging markets should drive continued growth. In the interests of continuing this growth, WD recently acquired HGST to expand their footprint.

Western Digital has a solid technology pipeline, and is in the process of developing various new products, SSD-related and otherwise.

Stock Valuation Overview: ★★★★★

Key valuation metrics suggest Western Digital is substantially undervalued. The trailing P/E ratio, 5-yr PEG ratio, Price/Cash Flow ratio, Price/Sales ratio, and Price/Book ratio are all substantially below industry averages. Considering the S&P 500's 15.5x trailing P/E ratio, Western Digital's P/E ratio is absurdly low, especially considering the growth statistics I just outlined.

Western Digital Computer and Peripherals
Trailing P/E Ratio 6.99 17.37
5-yr PEG Ratio 0.38 0.91
Price/Cash Flow 4.30 10.76
Price/Sales 0.71 3.14
Price/Book 1.17 5.24

Analyst/Investor Opinion: ★★★★★

Western Digital has a very high 9.3/10 "Bullish" rating according to Starmine's Equity Summary Score. Analysts with outstanding "Buy" or "Outperform" ratings include Ford Equity Research, Standard and Poor's, EVA Dimensions, and Columbine Capital Services. Average analyst price targets start and $45 and head up to about $55, representing a 50-80% premium to current market price.

Return Potential: ★★★★

As reflected in the valuation section, Western Digital is substantially undervalued in terms of financial metrics. In terms of P/E ratio, the stock can stand to double and still look fairly inexpensive.

In terms of total return, I prefer Seagate to Western Digital, mainly because of Seagate's dividend program. Seagate has a 5% dividend and is committed to maximizing shareholder value through dividend increases as well as stock buybacks. Western Digital, on the other hand, has no dividend. However, given the stock's relatively cheap valuation multiples, investors can still expect a solid return from price appreciation.

Cautionary Factors

One potential headwind to analyze before investing in any company in the hard drive industry is the rise of cloud computing. Western Digital derives a large percentage of revenue and earnings from consumer hard drives. As cloud computing comes into favor, large consumer hard drives and backup external hard drives may become less popular. While storage media will always be required somewhere (cloud computing still requires hard drives in servers), Western Digital may need to shift strategies in the future to adapt to changing market conditions.

I believe Western Digital is moving in this direction already with products such as the My Book Live. On the server side, WDC has products as well, although reviews suggest Seagate may have an edge.

Competitors and Related Companies

Seagate is the only other major player in the hard drive sector. Seagate boasts similar valuation and growth stats to Western Digital, and a very attractive dividend. The lack of many major competitors gives Western Digital a good position, although my research suggests Seagate currently has the upper hand.

Conclusion: Western Digital is a Buy

I believe Western Digital is undervalued, although I personally prefer Seagate (see: Seagate Set To Shine.) Another quarter of strong earnings could spur a very sharp rally in Western Digital's stock.

Disclosure: I am long STX. I may initiate a long position in WDC over the next 72 hours.

Disclaimer: I am an individual investor, not a licensed investment advisor or broker dealer. Investors are cautioned to perform their own due diligence. All information contained within this report is presented as-is and has been derived from public sources & management. Always contact a financial professional before making any major financial decisions. All investments have an inherent degree of risk. The future is uncertain, and actual results may be materially different from those expected. Past performance is no guarantee of future results. All views expressed herein are my own, and cannot be interpreted as the views of my employer(s) or any organizations I am affiliated with. Presentation of information does not necessarily constitute a recommendation to buy or sell. Never make any investment without conducting your own research and reading multiple points of view.