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Western Digital - Storing Stuff

|Includes: Western Digital Corporation (WDC)
Summary

Time to buy?

Western Digital Corporation is a developer, manufacturer, and provider of data storage devices and solutions that address the needs of the information technology (“IT”) industry. The company’s portfolio of products serves the Client Device; Data Center Device and Solutions; and Client Solution IT markets, Revenue is also generated thru license and royalty revenue. Industry peers include EMC Corporation, Seagate Technology PLC, and Toshiba Corporation.

Short-Term Value
My short-term (3-6 week hold) target price for the stock is $75.24, with an initial trailing stop set at $58.06. With a current price of $58.94, upward price movement will find resistance at $60.11 and $64.63, with final resistance found at $70.01. Downward price movement will find support at $57.48.

Days to Cover
The most recent days to cover number is 2. The days to cover number is a measurement of the company’s outstanding shares that are currently shorted, expressed as the number of days required to close out all the short positions. The number is determined by dividing the number of outstanding shares currently shorted by the average daily volume. The days to cover number is sometimes used as a volatility precursor for a stock.

The Tax Act
It is import that investors understand the potential impacts of the Tax Act since changes mandated by The Act can distort earnings and consequently fair value.

The Tax Cuts and Jobs Act of 2017 makes broad and complex changes to the U.S. tax code, including, but not limited to, (1) reducing the U.S. federal corporate tax rate from 35% to 21%; (2) requiring companies to pay a one-time deemed repatriation transition tax (the “Transition Tax”) on certain earnings of foreign subsidiaries; (3) generally eliminating U.S. federal income taxes on dividends from foreign subsidiaries; (4) requiring a current inclusion in U.S. federal taxable income of certain earnings of controlled foreign corporations; (5) eliminating the corporate alternative minimum tax (“AMT”) and changing how AMT credits can be realized; (6) capital expensing; (7) eliminating the deduction on U.S. manufacturing activities; and (8) creating new limitations on deductible interest expense and executive compensation.

In the case of Western Digital, the company has not finalized the accounting for the tax effects of the enactment of the 2017 Act. However, consistent with applicable SEC guidance, the company has made a reasonable estimate of the effects on the company’s existing deferred tax balances and the one-time mandatory deemed repatriation tax required by the 2017 Act and has recognized a provisional income tax expense of $1.57 billion for the one-time mandatory deemed repatriation tax and a provisional income tax benefit of $65 million related to the re-measurement of deferred tax assets and liabilities for the year ended June 29, 2018.

Unrelated Income
Income unrelated to a company’s day to day operation, such as income tax benefits or income from other sources will distort a company’s earnings and consequently its fair value. Investors should always explore the sources of a company’s earnings to better understand potential valuation impacts. For Western Digital none of the company’s operating income came from income tax benefits or from other sources.

Insider Transactions
The SEC classifies insiders as the “management, officers or any beneficial owners with more than 10% class of a company’s security.” Insiders are required to abide by certain rules and fill out SEC forms every time they buy or sell company shares. In addition, to prevent insider trading, or benefiting illegally from material non-public information that their positions give them access to, the law prevents insiders from deposing of shares within six months of their purchase. This effectively bars insiders from profiting from quick trades based on their “insider” knowledge.

In the past 12 months, the company has reported 167 insider trades involving 2,305,602 shares of stock. Of those 167 insider trades, 95 were Buys involving 1,502,813 shares of stock, and 75 were Sells involving 802,789 shares of stock, creating an insider buy to sell ratio of 1.9 to 1.

Mergers/Acquisitions
There were no company mergers or business acquisitions during fiscal 2018.

Divestitures/Dispositions
In July 2018, the company announced the closing of its HDD manufacturing facility in Kuala Lumpur, Malaysia, in order to reduce its manufacturing costs and consolidate HDD operations into Thailand. The company expects the closure to be substantially completed by the end of the calendar year 2019 and to result in total pre-tax charges of approximately $160 million.

Subsequent Events
Aside from stock repurchases, dividend payments, treasury stock repurchases, and loss contigencies due to on-going legal proceedings, all of which are part of the company’s normal business activities, there were no subsequent events announced after the close of the company’s current fiscal year.

Year-Over-Year Metrics
Several year over year metrics that are of interest to many investors are revenue growth, free cash flow growth, earnings growth, debt growth, price growth, and year to date price growth. For Western Digital, revenue increased by 8%, earnings increased by 84%, free cash flow increased by 10%, debt decreased by 15%, and the stock price decreased by 14%. Year to date the stock price is down 24%.

Future Value
My future (5 year hold) target price for the stock is $178, which is an average annual return of 40%. A prior five year hold of the stock (FY2014- FY2018) would have returned an average of 5% per year. Past and future gains are based on actual and anticipated earnings, actual and anticipated dividends, and actual and anticipated price appreciation. Any investment has the potential for loss, and past performance is no guarantee of future results.

Baseline and Fair Value
As an on-going concern, my current baseline valuation for the company is $61. Baseline valuations are based on free cash flow value, net current asset value, book value, and tangible book value. My current fair value estimate for the stock is $85. The fair value estimate is my current valuation for a stock based on earnings, earnings growth, and the current 5-year yield of a AAA rated corporate bond. Value investing initiate, reduce, and terminate targets are derivatives of fair value.

Other Value Considerations
Other value considerations include the PE Ratio, the PEG Ratio, the Price to Book Ratio and the Price to Tangible Book Ratio. For Western Digital, the PE Ratio is 10, the PEG Ratio is 0.2, the Price to Book Ratio is 1.5, and the Price to Tangible Book Ratio is (14).

Fair Warning
Fair warning means that the time for bidding has ended and an exchange is about to be concluded. Western Digital Corporation (NYSE: WDC) – FYE 06/2018 – INITIATE The stock is currently trading at levels in line with my most recent $51 initiate target. Please See Linked PDF Worksheet

Financial Data
Financial data used in this report was taken from the most recent SEC 10-K filing as reported to the U.S. Securities and Exchange Commission on 08/02/2018 at 16:45:52 HRS.

Disclosure
I hold no shares of Western Digital Corporation

Disclaimer
I am not a licensed or registered investment professional, nor am I licensed or registered with any government agency as such. Always consult a registered professional investment advisor before investing any money.
Copyright © 2018 Wax Ink
Posted on 10/01/18

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