Benjamin Graham taught that Intelligent Investors must do a thorough fundamental analysis of investment opportunities to determine their intrinsic value and inherent risk. Â This isÂ 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. Â By using theÂ ModernGraham methodÂ one can review a company’s historical accomplishments and determine an intrinsic value that can be compared across industries. Â What follows is a specific look at how Western Digital Corp fares in theÂ ModernGraham valuation model.
Company ProfileÂ (obtained fromÂ Google Finance):Â Western Digital Corporation (Western Digital) is a developer and manufacturer of storage solutions, which enables people to create, manage, experience and preserve digital content. The Company designs and makes storage devices and home entertainment products under the HGST, WD and G-Technology brands. The Company’s principal products are hard drives that use one or more rotating magnetic disks (magnetic media) to store and allow fast access to data. Hard drives are primary storage medium for digital content. The Company operates its global business through two independent subsidiaries: Hitachi Global Storage Technologies Holdings Pte. Ltd. (HGST) and Western Digital Corporation (WD). In September 2013, the Company announced that it has completed the acquisition of sTec, Inc. In October 2013, Western Digital Corporation completed the acquisition of Virident Systems, Inc.
Defensive Investor – must pass at least 6 of the following 7 tests: Score = 5/7
- Adequate Size of Enterprise – market capitalization of at least $2 billion – PASS
- Sufficiently Strong Financial Condition – current ratio greater than 2 – FAIL
- Earnings Stability – positive earnings per share for at least 10 straight years – PASS
- Dividend Record – has paid a dividend for at least 10 straight years – FAIL
- Earnings Growth – earnings per share has increased by at least 1/3 over the last 10 years using 3 year averages at beginning and end of period – PASS
- Moderate PEmg ratio – PEmg is less than 20 – PASS
- Moderate Price to Assets – PB ratio is less than 2.5 or PB x PEmg is less than 50 – PASS
Enterprising Investor – must pass at least 4 of the following 5 tests or be suitable for a defensive investor: Score = 5/5
- Sufficiently Strong Financial Condition, Part 1 – current ratio greater than 1.5 – PASS
- Sufficiently Strong Financial Condition, Part 2 – Debt to Net Current Assets ratio less than 1.1 – PASS
- Earnings Stability – positive earnings per share for at least 5 years – PASS
- Dividend Record – currently pays a dividend – PASS
- Earnings growth – EPSmg greater than 5 years ago – PASS
|Value Based on 3% Growth||$84.02|
|Value Based on 0% Growth||$49.25|
|Market Implied Growth Rate||3.46%|
|Net Current Asset Value (NCAV)||$6.69|
Balance Sheet – 12/31/2013
Earnings Per Share
Earnings Per Share – ModernGraham
Western Digital Corp is a very intriguing company for Enterprising Investors, as it passes all five of the investor type’s requirements. Â It does not qualify for Defensive Investors due to its low current ratio and lack of a ten year dividend history. Â As a result,Â Enterprising Investors following the ModernGraham approach based on Benjamin Graham’s methods should feel comfortable proceeding with further research into the company as well as other opportunities, including a review ofÂ 5 Undervalued Companies for the Enterprising InvestorÂ andÂ 5 Low PEmg Companies for the Enterprising Investor. Â As for a valuation, the company appears to be significantly undervalued despite the recent rise in the market price. Â The company has grown its EPSmg (normalized earnings) from $3.75 in 2010 to an estimated $5.79 for 2014, a level of demonstrated growth that surpasses the market’s implied estimate of 3.46% earnings growth. Â This leads the ModernGraham valuation model to return an estimate of intrinsic value that is well above a margin of safety relative to the current price.
The next part of the analysis is up to individual investors, and requires discussion of the company’s prospects. Â What do you think? Â What value would you put on Western Digital Corp (WDC)? Â Where do you see the company going in the future? Â Is there a company you like better? Â Leave aÂ comment on ourÂ Facebook pageÂ or mentionÂ @ModernGrahamÂ on Twitter to discuss.
If you like our valuations, why not check outÂ ModernGraham Stocks & Screens? Â It’s a great way to review the valuations while screening for things like low PE ratio, undervalued companies, etc.!
Disclaimer: Â The author did not hold a position in Western Digital Corp (WDC) or any of the other companies listed in this article at the time of publication and had no intention of changing that position within the next 72 hours.
Logo taken from wikipedia; this article is not affiliated with the company in any manner.