Wednesday, July 29, 2009

Western Digital blows by estimates. Now what? (WDC)

AlphaNinja - Last night, disk drive maker Western Digital (WDC) blew away the street estimate for 4th quarter earnings, reporting 76cents per share in profits versus an expectation of 28cents. In a "where do we go from here" reaction, the market is sending shares down about 2.5% to $30 -- God help WDC if they MISS an quarter.

-->>On the conference call, they guided earnings for the upcoming quarter to a range of 75-82cents, versus the current street consensus of 48cents. Impressively, that's even above the street-high estimate of 74cents.

Street Reactions:

-->>Baird drops its rating to Neutral from Outperform, yet increases the target price to $34 from $26. Sooooo, yesterday the stock was an Outperform while trading $5 above the target price, yet today it's a Neutral despite being $4 below the new target?

-->>Collins Stewart noted that HDD(Hard Disk Drive) unit shipments outgrew the market, yet an extra week in the quarter inflated that. They worry that the stock is currently trading at a peak multiple on peak earnings, and would be more interested should the shares drop to the mid-20's.

-->>AmTech focused on the industry dynamics, noting positively that competitor Seagate has tempered Capex (Capital Expenditures) plans, meaning supply should stay in check and pricing may hold up well.

WDC management is fantastic (their quick responses to market conditions often result in industry-leading factory utilization rates), yet on conference calls they still pray for "industry participants" to focus on profitability -->> to some degree, the company is always at the mercy of others in the industry increasing supply to the detriment of pricing.

Western Digital shares are up huge since I first picked them up back in November (I do not own them now). The FCFY (Free Cash Flow Yield) was in the high 20% range when the stock traded in the low teens, and now it looks to be between 10-15% depending on next year's earnings. For me that yield is not enough to be involved in this name, because of the incredible volatility in the sector.

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