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.
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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
| 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
| 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
Other ModernGraham posts about related companies
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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