IT Hardware Stocks

Western Digital Corporation Valuation – August 2016 $WDC

Benjamin Graham taught that Intelligent Investors must do a thorough fundamental analysis of investment opportunities to determine their intrinsic value and inherent risk.  This is best done by utilizing a systematic approach to analysis that will provide investors with a sense of how a specific company compares to another company or by reviewing the 10 Companies Benjamin Graham Would Invest In Today – July 2016.  By using the ModernGraham method one can review a company’s historical accomplishments and determine an intrinsic value that can be compared across industries.  What follows is a stock analysis showing a specific look at how Western Digital Corporation (WDC) fares in the ModernGraham valuation model.

Company Profile (obtained from Google Finance): Western Digital Corporation (Western Digital) is a developer, manufacturer and provider of data storage solutions that enable consumers, businesses, governments and other organizations to create, manage, experience and preserve digital content. The Company’s product portfolio includes hard disk drives (HDDs), solid-state drives, direct attached storage solutions, personal cloud network attached storage solutions, and public and private cloud data center storage solutions. HDDs are its principal products. Its products are marketed under the HGST, SanDisk and WD brand names. Western Digital serves original equipment manufacturers, distributors, resellers, cloud infrastructure players and consumers. It has manufacturing facilities in China, Japan, Malaysia, the Philippines and Thailand, as well as sales offices throughout the Americas, Asia Pacific, Europe and the Middle East. Its subsidiaries include Hitachi Global Storage Technologies Holdings Pte. Ltd. and SanDisk Corporation.

WDC Chart

WDC data by YCharts

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Premium members can view a full ModernGraham valuation of the company and have access to download a PDF version of the valuation for easy reference. Here is a free sample valuation pdf, and here is a post detailing what can be found within each individual company’s valuation.

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Downloadable PDF version of this valuation:

ModernGraham Valuation of WDC – August 2016

Stage 1: Is this company suitable for the Defensive Investor or the Enterprising Investor?

What kind of Intelligent Investor are you?

Defensive Investor; must pass 6 out of the following 7 tests.
1. Adequate Size of the Enterprise Market Cap > $2Bil $11,044,891,369 Pass
2. Sufficiently Strong Financial Condition Current Ratio > 2 1.81 Fail
3. Earnings Stability Positive EPS for 10 years prior Pass
4. Dividend Record Dividend Payments for 10 years prior Fail
5. Earnings Growth Increase of 33% in EPS in past 10 years using 3 year averages at beginning and end -12.74% Fail
6. Moderate PEmg Ratio PEmg < 20 12.57 Pass
7. Moderate Price to Assets PB Ratio < 2.5 OR PB*PEmg < 50 1.09 Pass
Enterprising Investor; must pass 4 out of the following 5 tests, or be suitable for the Defensive Investor.
1. Sufficiently Strong Financial Condition Current Ratio > 1.5 1.81 Pass
2. Sufficiently Strong Financial Condition Debt to NCA < 1.1 2.42 Fail
3. Earnings Stability Positive EPS for 5 years prior Pass
4. Dividend Record Currently Pays Dividend Pass
5. Earnings Growth EPSmg greater than 5 years ago Fail

Stage 2: Determination of Intrinsic Value

WDC value chart August 2016

EPSmg $3.71
MG Growth Estimate -2.98%
MG Value $9.39
Opinion Overvalued
MG Grade C
MG Value based on 3% Growth $53.77
MG Value based on 0% Growth $31.52
Market Implied Growth Rate 2.03%
Current Price $46.60
% of Intrinsic Value 496.18%

Western Digital Corp does not satisfy the requirements of either the Enterprising Investor or the more conservative Defensive Investor. The Defensive Investor is concerned with the low current ratio, insufficient earnings growth over the last ten years, and the poor dividend history. The Enterprising Investor has concerns regarding the level of debt relative to the net current assets, and the lack of earnings growth over the last five years. As a result, all value investors following the ModernGraham approach should explore other opportunities at this time or proceed cautiously with a speculative attitude.

As for a valuation, the company appears to be Overvalued after seeing its EPSmg (normalized earnings) decline from $4.63 in 2013 to an estimated $3.71 for 2017. This level of demonstrated earnings growth does not support the market’s implied estimate of 2.03% annual earnings growth over the next 7-10 years. As a result, the ModernGraham valuation model, based on the Benjamin Graham value investing formula, returns an estimate of intrinsic value below the price.

At the time of valuation, further research into Western Digital Corp revealed the company was trading below its Graham Number of $57.8. The company pays a dividend of $2 per share, for a yield of 4.3%, putting it among the best dividend paying stocks today. Its PEmg (price over earnings per share – ModernGraham) was 12.57, which was below the industry average of 22.64, which by some methods of valuation makes it one of the most undervalued stocks in its industry. Finally, the company was trading above its Net Current Asset Value (NCAV) of $-34.99.

Western Digital Corp receives an average overall rating in the ModernGraham grading system, scoring a C.

Stage 3: Information for Further Research

WDC charts August 2016

Net Current Asset Value (NCAV) -$34.99
Graham Number $57.80
PEmg 12.57
Current Ratio 1.81
PB Ratio 1.09
Current Dividend $2.00
Dividend Yield 4.29%
Number of Consecutive Years of Dividend Growth 5

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Useful Links:

ModernGraham tagged articles Morningstar
Google Finance MSN Money
Yahoo Finance Seeking Alpha
GuruFocus SEC Filings

Most Recent Balance Sheet Figures

Balance Sheet Information 6/1/2016
Total Current Assets $12,584,000,000
Total Current Liabilities $6,949,000,000
Long-Term Debt $13,660,000,000
Total Assets $32,877,000,000
Intangible Assets $14,985,000,000
Total Liabilities $21,717,000,000
Shares Outstanding (Diluted Average) 261,000,000

Earnings Per Share History

Next Fiscal Year Estimate $3.10
Jun2016 $1.06
Jun2015 $6.18
Jun2014 $6.68
Jun2013 $3.98
Jun2012 $6.58
Jun2011 $3.09
Jun2010 $5.93
Jun2009 $2.08
Jun2008 $3.84
Jun2007 $2.50
Jun2006 $1.76
Jun2005 $0.90
Jun2004 $0.69
Jun2003 $0.87
Jun2002 $0.34
Jun2001 -$0.31
Jun2000 -$2.69
Jun1999 -$5.51
Jun1998 -$3.32
Jun1997 $2.86

Earnings Per Share – ModernGraham History

Next Fiscal Year Estimate $3.71
Jun2016 $4.31
Jun2015 $5.72
Jun2014 $5.41
Jun2013 $4.63
Jun2012 $4.74
Jun2011 $3.71
Jun2010 $3.75
Jun2009 $2.51
Jun2008 $2.46
Jun2007 $1.63
Jun2006 $1.10
Jun2005 $0.68
Jun2004 $0.31
Jun2003 -$0.41
Jun2002 -$1.46
Jun2001 -$2.17

Recommended Reading:

Other ModernGraham posts about the company

10 Low PE Stock Picks for the Defensive Investor – August 2016
10 Low PE Stocks for the Defensive Investor – July 2016
10 Undervalued Companies for the Defensive Dividend Stock Investor – June 2016
10 Companies Benjamin Graham Would Invest In Today – June 2016
10 Low PE Stocks for the Defensive Investor – June 2016

Other ModernGraham posts about related companies

Apple Inc Valuation – August 2016 $AAPL
Ametek Inc Valuation – August 2016 $AME
MTS Systems Corp Valuation – July 2016 $MTSC
Seagate Technology PLC Valuation – July 2016 $STX
Broadcom Limited Valuation – July 2016 $AVGO
Microchip Technology Inc Valuation – July 2016 $MCHP
Jabil Circuit Inc Valuation – July 2016 $JBL
KLA-Tencor Corp Valuation – July 2016 $KLAC
Linear Technology Corp Valuation – July 2016 $LLTC
Arrow Electronics Inc Valuation – July 2016 $ARW

Disclaimer:

The author held a long position in Western Digital Corporation but did not hold a position in any other company mentioned in this article at the time of publication and had no intention of changing that position within the next 72 hours.  See my current holdings here.  This article is not investment advice; any reader should speak to a registered investment adviser prior to making any investment decisions.  ModernGraham is not affiliated with the company in any manner.  Please be sure to review our detailed disclaimer.

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