Western Digital Offers Great Value

A) Introduction

Western Digital Corporation (NASDAQ:WDC) is the dominant HDD manufacturer in the United States with over 45% of the entire market. While HDD's are neither as fast nor durable as SDDs, they are more than seven times cheaper. So while it's true that SDDs are taking market share, HDDs are not going anywhere anytime soon. In fact, HDD sales are expected to continue to grow for the next four years (more on that later).

In this article we'll outline why Western Digital offers the perfect combination of value, price momentum, profit growth, and efficiency. The report will start with a breakdown of Western Digital's valuation profile, then will proceed to an analysis of the price and profit growth, followed by an analysis of recent "smart money" transactions, and concluding with some qualitative analysis and conclusions. We take a quantitative approach to investing, preferring to focus our analysis on metrics that have strong predictive ability. Thus, we tend to analyze academic papers and perform historical back tests on different metrics before including them in our analysis. We will provide links to the academic papers we draw inspiration from as we progress through our breakdown of the stock so investors can see for themselves what we base our conclusions on. Investors looking to learn more about our analytical style can check out our website.

B) Valuation Breakdown

We'll start by analyzing Western Digital's value profile. This is important to look at as Nobel laureate Eugene Fame has found that "Value stocks have higher average returns than growth stocks." Western Digital's valuation profile is shown below:)


There are a few interesting things to note from the table above. First, Western Digital is a cash flow machine. The companies free cash flow yield - which we can derive by inverting price/free cash flow - is 8.25%. This is higher than their earnings yield (6.07%) meaning the company generates more free cash flow than actual earnings. Free cash flow is a much more indicative and practical measure of how a company is performing, as it is much harder to manipulate. The fact that WDC is trading at a Price/FCF of 12 when the overall market is trading at an average of 86 shows that stock is severely undervalued on a relative basis. This is a good sign as study after study shows that stocks trading on lower price multiples tend to outperform the market. WDC looks fairly attractive on a book value basis as well, with its price/book (2.75) being lower than the industry group (3.50), sector (5.08), and overall market (6.89) averages. Overall, we rate Western Digital as "Undervalued" and expect the stock to outperform the market by 3.67% over the next twelve months.

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Disclosure: The author has no positions in any stocks mentioned, but may initiate a long position in SPLS over the next 72 hours. The author wrote this article themselves, and it expresses their ...

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