Western Digital Corp Quarterly Valuation – June 2014 $WDC

500px-WesternDigitalLogo.svgBenjamin 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 5 Highest Dividend Yields Among Undervalued Companies for the Enterprising Investor.  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 specific look at how Western Digital Corp (WDC) fares in the ModernGraham valuation model.

Company Profile (obtained from Google Finance): 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.

WDC Chart

WDC data by YCharts

Defensive Investor – must pass at least 6 of the following 7 tests: Score = 6/7

  1. Adequate Size of Enterprise – market capitalization of at least $2 billion – PASS
  2. Sufficiently Strong Financial Condition – current ratio greater than 2 - PASS
  3. Earnings Stability – positive earnings per share for at least 10 straight years - PASS
  4. Dividend Record – has paid a dividend for at least 10 straight years - FAIL
  5. 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
  6. Moderate PEmg ratio – PEmg is less than 20 – PASS
  7. 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

  1. Sufficiently Strong Financial Condition, Part 1 – current ratio greater than 1.5 – PASS
  2. Sufficiently Strong Financial Condition, Part 2 – Debt to Net Current Assets ratio less than 1.1 – PASS
  3. Earnings Stability – positive earnings per share for at least 5 years – PASS
  4. Dividend Record – currently pays a dividend - PASS
  5. Earnings growth – EPSmg greater than 5 years ago – PASS

Valuation Summary

Key Data:

Recent Price $91.89
MG Value $146.66
MG Opinion Undervalued
Value Based on 3% Growth $84.55
Value Based on 0% Growth $49.57
Market Implied Growth Rate 3.63%
Net Current Asset Value (NCAV) $7.41
PEmg 15.76
Current Ratio 2.22
PB Ratio 2.46

Balance Sheet – 3/31/2014

Current Assets $8,306,000,000
Current Liabilities $3,747,000,000
Total Debt $2,344,000,000
Total Assets $15,332,000,000
Intangible Assets $3,097,000,000
Total Liabilities $6,564,000,000
Outstanding Shares 235,000,000

Earnings Per Share

2014 (estimate) $7.94
2013 $3.98
2012 $6.58
2011 $3.09
2010 $5.93
2009 $2.08
2008 $3.84
2007 $2.50
2006 $1.76
2005 $0.91
2004 $0.70

Earnings Per Share – ModernGraham

2014 (estimate) $5.83
2013 $4.63
2012 $4.74
2011 $3.71
2010 $3.75
2009 $2.51

Dividend History

WDC Dividend Chart

WDC Dividend data by YCharts


Western Digital Corp is suitable for either the Defensive Investor or the Enterprising Investor.  The Defensive Investor’s only concern is the short dividend history while the company passes all of the Enterprising Investor’s requirements.  As a result, value investors following the ModernGraham approach based on Benjamin Graham’s methods should feel comfortable proceeding with further research into the company and comparing it to other opportunities.  From a valuation side of things, the company appears significantly undervalued after growing its EPSmg (normalized earnings) from $3.75 in 2010 to an estimated $5.83 for 2014.  This strong level of demonstrated growth outpaces the market’s implied estimate of 3.63% earnings growth and leads the ModernGraham valuation model, based on Benjamin Graham’s formula, to return an estimate of intrinsic value above the price.

Be sure to check out the previous ModernGraham valuations of Western Digital Corp (WDC) for more perspective!

The next part of the analysis is up to individual investors, and requires discussion of the company’s prospects.  What do you think?  What value would you put on Western Digital Corp (WDC)?  Where do you see the company going in the future?  Is there a company you like better?  Leave a comment on our Facebook page or mention @ModernGraham on Twitter to discuss.

Disclaimer:  The author did not hold a position in Western Digital Corp (WDC) or 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.  Logo taken from wikipedia for the sole purpose of identifying the company; this article is not affiliated with the company in any manner.

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