Why Western Digital Could Be A Value Play, According To These Analysts

April 14, 2015

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In a report published Tuesday, BofA Merrill Lynch analysts upgraded the rating on Western Digital Corporation (NYSE: WDC) to Buy, with a price objective of $117, following the recent decline in the company’s share price.

The analysts believe that the “fundamentals have bottomed” and that the company’s stock has “become attractive at current levels.”

Western Digital’s share price has declined by 16 percent since the beginning of March. “As a positive, pricing is holding up surprisingly well, given the unit weakness, and the mix shift to higher-margin enterprise HDDs is providing a high degree of resiliency to the GM%,” the analysts said.

In the report BofA Merrill Lynch noted, “In the past few weeks our checks have indicated an incrementally weaker PC market, with further downside to both desktop and notebook HDD units. We now have overall HDD unit TAM at 126mn for the March quarter (vs. WDC/STX guidance of 135mn and our prior 130mn units). For the June-Q our TAM goes to 129mn from 132mn, and for C2015 our estimate is now at 525mn from 534mn units.”

The analysts believe that the company will benefit from data storage growth, with demand from cloud providers being a “tailwind for capacity enterprise HDDs” as well as enterprise SSDs in the longer term.

“Our analysis shows that a secular mix shift toward capacity enterprise drives creates uplift for ASPs, and gross margins that somewhat offset the cyclicality in the PC business. WDC’s strong presence in SSDs also ensures that the cannibalization of performance drives is not a significant net negative,” the report added.

The March quarter revenue and EPS have been reduced from $3.63bn and $1.90 to $3.45bn and $1.77, respectively. For FY16, the revenue and EPS estimates have been cut from $15.3bn and $8.66 to $14.8bn and $8.22. The downward revision in estimates reflects lower PC hard-disk-drives (HDDs).