Western Digital, Misunderstood Merger With Significant Upside And Limited Downside
Alex Zhao, CFA • 40 Comments
Alex Zhao, CFA • 40 Comments
The Street's Upcoming Affair With SanDisk
Thu, May 26, 5:33 PM
- With the SanDisk acquisition on the books as of May 12, Western Digital (NASDAQ:WDC) now expects FQ4 (calendar Q2) revenue of $3.35B-$3.4B, up from a prior $2.6B-$2.7B. EPS guidance has been cut to $0.65-$0.70 from $1.00-$1.10, thanks partly to $220M in interest costs ($185M from newly-issued debt related to the SanDisk deal).
- Due to the equity issued in the SanDisk deal, FQ4 diluted share count is expected to be 266M, and equivalent to 290M on a full-quarter basis (i.e. if SanDisk was on the books for the whole quarter). This compared with an FQ3 diluted share count of 234M.
- WDC -0.9% after hours to $44.00. Shares are still up 11% on the week, thanks in large part to upgrades from Barclays and Cowen. Western has updated its quarterly factsheet (.pdf) to reflect its new guidance.
Wed, May 25, 10:54 AM
- Barclays' Mark Moskowitz has upgraded Western Digital (WDC +5.8%) to Overweight, and upped his target by $3 to $60. He argues the valuation is too low, that hard drives still have a future, and that multiples can grow as Western brings 3D NAND products to market (via just-acquired SanDisk) and lowers its debt load.
- The call comes a day after Cowen's Karl Ackerman upgraded to Outperform, while asserting the guidance Western is due to provide on Thursday "should help eliminate uncertainty" related to the SanDisk acquisition. He also cited low expectations, and declared SanDisk will help Western better serve enterprise and hyperscale (cloud data center) clients.
- Seagate (STX +3.4%) is following Western higher. Both companies were hammered in late April in response to weak earnings and guidance. Western is up 13% on the week.
- Now read Western Digital: Time To Be Optimistic
Mon, May 23, 12:39 PM
- "Politics is now a topic in every client discussion," say David Kostin and team, and the nature of today's electorate nearly assures a close race, even though prediction markets currently assign a high probability of a Clinton victory.
- When uncertainty rises, consumer staples (NYSEARCA:XLP) typically outperforms, while tech (NYSEARCA:XLK) lags.
- Getting down to names, with protectionism and tax policy two key areas of debate, buy those stocks with high U.S. sales and high effective tax rates, and avoid those with high foreign sales and low tax rates.
- High U.S. sales and high tax rates (buy): Cardinal Health (NYSE:CAH), Fidelity National (NYSE:FIS), Discover (NYSE:DFS), AmerisourceBergen (NYSE:ABC), Schwab (NYSE:SCHW), ADP (NASDAQ:ADP), Chipotle (NYSE:CMG), Reynolds America (NYSE:RAI), Express Scripts (NASDAQ:ESRX), Alliance Data (NYSE:ADS), Fiserv (NASDAQ:FISV), Paychex (NASDAQ:PAYX), Whole Foods (NASDAQ:WFM), Akamai (NASDAQ:AKAM), Intuit (NASDAQ:INTU), Southwest Airlines (NYSE:LUV).
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Thu, May 12, 10:03 AM
- With the final approval in place from China's Ministry of Commerce, Western Digital (WDC +0.2%) today has closed on its acquisition of SanDisk (NASDAQ:SNDK).
- Debt financing has been consummated and funds released from escrow. SanDisk owners receive $67.50 in cash and 0.2387 shares of Western Digital for each of their SanDisk shares; SNDK closed yesterday at $76.18.
- The deal had previously cleared hurdles in the U.S., EU, Singapore, Japan, Taiwan, South Korea, South Africa and Turkey.
- Integration begins immediately with Steve Milligan continuing as CEO of Western Digital, while SanDisk co-founder, President and CEO Sanjay Mehrotra will join the WDC board.
- Now read Western Digital Stock Is A Contrarian Value Play »
Tue, May 10, 5:53 PM
- Alaska Air Group (NYSE:ALK) has moved up another 1% after hours on news that it's headed to the S&P 500, replacing SanDisk (SNDK +1.4%), which is set to be acquired by Western Digital on Thursday.
- Correspondingly, Texas Roadhouse (NASDAQ:TXRH) has gained 1.3% postmarket as it leaves the SmallCap 600 to replace Alaska Air Group in the MidCap 400, and Cavco Industries (NASDAQ:CVCO) has jumped 7.3% as it heads into the SmallCap 600 to replace Texas Roadhouse.
- The moves are set after the close of trading on Thursday, to coincide with the closure of the SanDisk acquisition.
- Now read A Strong Quarter For Alaska Bodes Well For The Virgin America Acquisition »
Tue, May 10, 8:24 AM| Tue, May 10, 8:24 AM | 7 Comments
Wed, May 4, 8:10 AM
Fri, Apr. 29, 10:43 AM
- Seagate (STX -15%) has tumbled after missing FQ3 EPS estimates (revenue was in-line with what the company guided for in its April 13 warning) and guiding on its earnings call for FQ4 revenue of $2.3B, below a $2.61B consensus.
- Likewise, archrival Western Digital (WDC -12.6%) has tumbled after missing FQ3 estimates and guiding on its earnings call for FQ4 revenue of $2.6B-$2.7B and EPS of $1.00-$1.10, below a consensus of $2.92B and $1.34.
- Both companies have been stung by weak PC demand and SSD cannibalization of hard drives. Western estimates the FQ3 addressable market (TAM) for hard drives was 99.8M, down from 115.1M in FQ2 and 125M a year earlier. On the call, it forecast FQ4 TAM will be around 95M. CEO Steve Milligan: "We anticipate that hard drive demand in the June quarter will be slightly down from the March quarter, given continued softer PC demand and weaker than expected demand in performance enterprise."
- Western's hard drive shipments fell 21% Y/Y to 43.1M, with notebook, desktop, consumer electronics, branded, and enterprise sales all falling. Seagate's shipments fell 22% to 39.2M - enterprise and "client compute" drive sales fell sharply, while consumer electronics and branded shipments rose slightly. Both Seagate and Western's average drive capacity was slightly over 1.4TB, with Western reporting a $60 ASP.
- Seagate's non-GAAP gross margin fell to 22.7% (close to what was forecast in the warning) from 25.6% in FQ2 and 28.9% a year ago. Western's GM fell to 28.1% from 28.5% in FQ2 and 30.5% a year ago. Job cuts boosted each company's bottom line: Western's non-GAAP operating expenses fell 19% Y/Y to $477M thanks in part to efforts to integrate its HGST unit. Seagate's opex fell 21% to $439M.
- Western still expects the SanDisk acquisition (will lower the company's hard drive dependence) to close in the June quarter (Chinese approval is pending), and will give updated guidance after it does. It now expects $800M/year of cost savings related to HGST integration by the end of 2017, up from a prior $650M.
- Seagate: FQ3 results, earnings release, slides (.pdf)
- Western: FQ3 results, details, earnings release, datasheet (.pdf)
Thu, Apr. 28, 4:55 PM
- Western Digital (NASDAQ:WDC) is off 4% in postmarket trading as its fiscal Q3 missed on top and bottom lines as revenue and profits dipped substantially.
- Ahead of a planned acquisition of SanDisk (NASDAQ:SNDK) to come in Q2, net income (non-GAAP) fell to $283M from a year-ago $441M. Revenues dropped nearly 21%.
- Cash from operations came to $485M, leaving total cash and equivalents at $5.9B.
- "Computer usage continues to shift from PCs to mobile devices and enterprise workloads are moving increasingly to cloud-based architectures," says CEO Steve Milligan. "Our strategy to become a broad-based provider of media-agnostic storage solutions anticipates these and other trends."
- The company will provide guidance along with a conference call to come at 5 p.m. ET.
- Press Release
Thu, Apr. 28, 4:21 PM
Wed, Apr. 27, 5:35 PM
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Wed, Apr. 27, 4:22 PM
- SanDisk (NASDAQ:SNDK) is up 0.5% after hours after solidly beating on top and bottom lines for Q1.
- Revenue fell 11% Q/Q, but was up 3% Y/Y. Free cash flow rose to $484M from the prior year's $200M.
- Gross profit was 42% of revenue (non-GAAP basis), down from the prior year's 43%.
- Net cash was $2.14B.
- With its acquisition by Western Digital (NASDAQ:WDC) pending, the company won't hold a conference call.
- Press release
Wed, Apr. 27, 4:12 PM
Tue, Apr. 26, 5:35 PM
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Mon, Apr. 18, 12:26 PM
- Brean recently published its most compelling investment ideas for Q2. Among them:
- ETSY - target price $20. Implied upside 126%. "We believe Etsy’s seller services efforts (advertising, payments, and shipping) provide multiple means for the company to materially increase the value of its platform of 24.0M buyers and 1.6M sellers of handmade and vintage merchandise."
- HRTX - target price $55. Implied upside 167%. "The FDA should finally get its act together and approve the Sustol NDA in early April. We view the almost 3-month delay as a nonissue because we do not believe that anything inherent about Sustol is causing the delay."
- SCYX - target price $16. Implied upside 276%. "SCY-078, SCYNEXIS’ lead product candidate, has the potential to become the first glucan synthase inhibitor available both orally and intravenously... Based on the size of the market, competition from other drug candidates in development is limited, and we expect SCY-078 to compete well in the market if approved."
- ARAY - target price $12. Implied upside 99%. "We believe the company is finally positioned to reliably grow at 2-3 times the market (which is currently posting 2-3% growth), and thus we are willing to stick our necks out and once again make this a top pick. We also see leverage in the P&L, anticipating further gross margin gains, but mostly from operating expenses, which are expected to grow at only half the rate of the top line."
- STX - target price $65. Implied upsdoide 152%. "We believe gross margin will continue to recover as product cycle drive, along with cost savings, will lead to margin expansion back to ~28%, from 24.2% and 25.6% in the Sep Q and the Dec Q, respectively. STX dividend yield of 7%+ displays confidence in the business model and its ability to remain extremely cash-flow generative."
- WDC - target price $120. Implied upside 191%. "We believe WDC / SNDK can generate FY17 EPS of $8.00+ and the stock “normalized” should garner at least a 12x multiple, with potential for 15x, expanding from current PE of <6x."
- CRM - target price $100. Implied upside 30%. "In our view, salesforce.com has now replaced SAP and ORCL as the de facto standard in enterprise business applications, which positions the company for the next stage of growth... Our checks indicate large global system integrators are actively pitching salesforce.com solutions over SAP and ORCL, reflecting salesforce.com’s de facto standard status in the enterprise application market."
- Now read How I Stopped Being A Jerk With My Money »
Thu, Apr. 14, 9:25 AM
Western Digital Corp. engages in the development, manufacture and provision of data storage solutions. Its product portfolio includes hard disk drives, solid-state drives marketed under the HGST, WD and G-Technology brands. It also offers mobile drives for the notebook, PC, gaming markets,... More
Industry: Data Storage Devices
Country: United States
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