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
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:
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- 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."
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- Now read How I Stopped Being A Jerk With My Money »
Thu, Apr. 14, 9:25 AM
Wed, Apr. 13, 7:28 PM
- Western Digital (NASDAQ:WDC) is down 4% after hours to $43.00 after archrival Seagate (down 6%) issued an FQ3 (calendar Q1) sales and gross margin warning.
- Among other things, Seagate blamed weak high-end enterprise hard drive demand, soft desktop product demand (particularly in China), and a decision not to compete in the low-capacity notebook market. Sales of 8TB nearline hard drives (benefiting from cloud demand) were strong.
- Western, due to lower its hard drive dependence by acquiring NAND flash giant SanDisk, reports on the afternoon of April 28. Seagate reports the following morning.
Tue, Apr. 12, 2:09 AM
- According to research firm Gartner, global shipments of personal computers fell 9.6% to 64.8M units during Q1, marking the sixth consecutive quarter of declines and the first time since 2007 that shipments dropped below 65M units (IDC reported similar results worldwide).
- In the U.S., PC shipments totaled 13.1M units, representing a 6.6% decline from a year earlier and the lowest volume in three years.
- The sector has faced headwinds in recent quarters which include an economic slowdown in China, the strong U.S. dollar and the growing popularity of smartphones.
- Related stocks: OTC:ASIYF, AMD, HPQ, INTC, OTCPK:LNVGY, MSFT, MU, NVDA, SNE, STX, OTCPK:TOSYY, WDC
Mon, Mar. 14, 4:52 PM
- Western Digital (WDC -3.4%) had a rough day after Jefferies' James Kisner cut his target by $12 to $65, while arguing the pending SanDisk (SNDK -0.6%) acquisition and NAND flash market weakness (relevant to SanDisk's core businesses) will act as overhangs.
- Citi's Stanley Kovler downgraded SanDisk to Neutral due to the small arb spread that now exists relative to Western's buyout price, but also talked up the deal's potential and predicted shareholders will approve. He now expects $525M/year in synergies being achieved in the months following the deal's closing, and $1.145B/year by 2020.
- $750M of the 2020 synergies are expected to come from Western's ability to vertically integrate NAND flash via SanDisk, and $375M are expected to come from higher client SSD sales by Western to OEMs. $205M in "dis-synergies" are forecast related to customers choosing to limit the combined firm's market share.
- The notes come as Western begins marketing $18B worth of debt it's looking to raise to help pay for the SanDisk. The debt consists of $8.1B worth of bridge loans, $9B of term loans, and a $1B revolving credit line. Moody's has granted Western's debt a Ba1 (non-investment grade speculative) rating.
- Following a Tsinghua Unigroup subsidiary's decision to cancel a planned $3.8B investment in Western, SanDisk shareholders are due to receive $67.50 in cash and 0.2387 Western shares for each share they own.
Tue, Feb. 23, 9:17 AM
Tue, Feb. 23, 8:09 AM
- The agreement for Unis to make a $3.775B equity investment in Western Digital (NASDAQ:WDC) is off after a decision by the Committee on Foreign Investment in the U.S. to investigate the proposed deal.
- Western Digital (WDC) reiterates its commitment to the purchase of SanDisk (NASDAQ:SNDK). Under the terms of that deal, SanDisk owners will receive $67.50 in cash and 0.2387 shares of WDC for each share of SanDisk they own. This values SanDisk at $78.50 per share based on last night's closing price.
- WDC is subject to a $184M break-up fee if it walks away from the purchase.
- Source: Press Release
- WDC -8.9% to $42, SNDK -4.8% to $64.44 premarket
Mon, Feb. 22, 10:57 AM
- SanDisk (SNDK -1.1%) dropped 2% in the last few minutes on a Dow Jones report that Alken Asset Management, a key shareholder in Western Digital (NASDAQ:WDC), is opposing the company's $19B buyout of SanDisk due to its price.
- Alken, which owns about 2.2% of Western Digital, will vote against stock issuance that the company might need to wrap the deal, according to a letter to the board seen by The Wall Street Journal.
- Western Digital came to an agreement to acquire the flash storage maker in October.
Thu, Feb. 11, 5:38 AM
Western Digital Corp. engages in the development, manufacture, and provision of data storage solutions. Its product portfolio includes hard disk drives and solid-state drives (SSD) marketed under the HGST, WD, and G-Technology brands. It also offers mobile drives for the notebook, PC, and gaming... More
Industry: Data Storage Devices
Country: United States
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